Asked by Mallory Connell on Jul 04, 2024
Verified
(Ignore income taxes in this problem.) A company is considering buying a machine that costs $500,000, has a useful life of ten years, and is depreciated over its useful life by the straight-line method.The salvage value of the machine at the end of ten years will be $40,000.This machine will replace an old machine that is fully depreciated; the old machine has a salvage value of $75,000 now.If the simple rate of return of this investment is 12.7%, then the anticipated annual incremental net operating income from this machine for each of the next ten years is:
A) $100,000
B) $63,825
C) $53,975
D) $46,380
Straight-Line Method
A depreciation method that allocates the cost of an asset evenly over its useful life.
Incremental Net Operating Income
The difference in net operating income between two alternatives.
Depreciated
Refers to the decrease in the value of an asset over time due to wear and tear or obsolescence.
- Explain the concept of the simple rate of return and its function in evaluating the efficacy of investment strategies.
Verified Answer
ZK
Zybrea KnightJul 07, 2024
Final Answer :
C
Explanation :
Simple rate of return = Annual incremental net operating income ÷ Initial investment
0.127 = Annual incremental net operating income ÷ ($500,000 - $75,000)
Annual incremental net operating income = 0.127 × ($500,000 - $75,000)= $53,975
0.127 = Annual incremental net operating income ÷ ($500,000 - $75,000)
Annual incremental net operating income = 0.127 × ($500,000 - $75,000)= $53,975
Learning Objectives
- Explain the concept of the simple rate of return and its function in evaluating the efficacy of investment strategies.