Average Rate of Return—Cost Savings Midwest Fabricators Inc. is considering an i

Question

Average Rate of Return—Cost Savings Midwest Fabricators Inc. is considering an investment in equipment that will replace direct labor. The equipment has a cost of $93,000 with a $8,000 residual value and a ten-year life. The equipment will replace one employee who has an average wage of $16,040 per year. In addition, the equipment will have operating and energy costs of $4,510 per year. Determine the average rate of return on the equipment, giving effect to straight-line depreciation on the investment. If required, round to the nearest whole percent.

Explanation / Answer

Annual Depreciation = ($93,000 - $8,000) / 10 = $8,500

Annual Net Income would increase = $16,040 - $4,510 - $8,500 = $3,030

Average Investment = ($93,000 + $8,000) / 2 = $50,500

Average rate of return = Annual Net Income would increase / Average Investment

Average rate of return = $3,030 / $50,500 = 6%

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.