Linwood is making an equipment change at his company. An old piece of equipment, with a salvage value of $60,000, is being replaced by new equipment. The new equipment costs $980,000 and would have a 10 year useful life and no salvage value. By replacing the equipment, Linwood will save $164,000 per year in cash operating costs. The simple rate of return on this investment is

The simple rate of return is 0.178 or 17.8%

Explanation:

From the given question, we solve for the simple rate return on this investment

Solution

Recall that, the simple rate of return is defined as:

The simple rate of return = The  operating  net cash savings /  Cash net investment

Thus,

The operating net cash savings = $164000  and

The cash net investment = $980000- $60000 = $920000

Then,

The Simple rate of return = $164000 / $920000 = 0.178 i.e. 17.8%

Therefore the simple rate of return on this investment is 0.178 or 17.8%

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