Denny Corporation Is Considering Replacing a Technologically Obsolete Machine with a New

question 105

Multiple Choice

Denny Corporation is considering replacing a technologically obsolete machine with a new state-of-the-art numerically controlled machine.The new machine would cost $450,000 and would have a ten-year useful life.Unfortunately,the new machine would have no salvage value.The new machine would cost $20,000 per year to operate and maintain,but would save $100,000 per year in labour and other costs.The old machine can be sold now for scrap for $50,000.The simple rate of return on the new machine is closest to which of the following? (Ignore income taxes in this problem.)

• A) 7.78%.
• B) 8.75%.
• C) 20.00%.
• D) 22.22%.

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Definitions:

Standard

A set of guidelines or principles established as a basis for comparison or measurement in quality assessment, production, and compliance.

Budget

A financial plan for a defined period, outlining an organization's projected revenues, expenses, and capital expenditures.

Standard Costs

Pre-determined or estimated costs of manufacturing, selling, or performing a service under normal conditions.

Management By Exception

A management strategy where only significant deviations from a budget or plan are brought to the attention of management.