At the beginning of the year 6 Hilltop Corporation is considering the replacement of an old machine that is currently being used. The old machine is fully depreciated but can be used by the corporation through year 10. If Hilltop decides to replace the old machine, Baker Company has offered to purchase it for $40,000 on the replacement date. The disposal value of the old machine would be zero at the end of year 10. Hilltop uses the straight-line method of depreciation for all classes of machinery.

If the replacement occurs, a new machine would be acquired from Busby Industries at the beginning of year 6. The purchase price of $500,000 for the new machine would be paid in cash at the time of replacement. Due to the increased efficiency of the new machine, estimated annual cash savings of $125,000 would be generated through year 10, the end of its expected useful life. The new machine is expected to have a zero disposal price at the end of year 10.

All operating cash receipts, operating cash expenditures, and applicable tax payments and credits are assumed to occur at the end of the year. Hilltop employs the calendar year for reporting purposes.

The accrual accounting rate of return on the net investment, to the nearest percent, is

a. 0%. b. 5.0.%. c. 5.43%. d. 28%.

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