The management of Wallingford MicroBrew is considering the purchase of an automa
ID: 2466494 • Letter: T
Question
The management of Wallingford MicroBrew is considering the purchase of an automated bottling machine for $101,200. The machine would replace an old piece of equipment that costs $37,000 per year to operate. The new machine would cost $15,000 per year to operate. The old machine currently in use could be sold now for a scrap value of $5,000. The new machine would have a useful life of 11 years with no salvage value.
Compute the simple rate of return on the new automated bottling machine. Use straight-line depreciation method.(Round your percentage answer to one decimal place.)
The management of Wallingford MicroBrew is considering the purchase of an automated bottling machine for $101,200. The machine would replace an old piece of equipment that costs $37,000 per year to operate. The new machine would cost $15,000 per year to operate. The old machine currently in use could be sold now for a scrap value of $5,000. The new machine would have a useful life of 11 years with no salvage value.
Explanation / Answer
Annual incremental Net operating income = $37,000 - 15,000 - ($101,200 / 11 years) = $12,800
Initial investment = $101,200 - 5,000 = $96,200
Simple rate of return = Annual incremental Net operating income / Initial investment
$12,800 / 96,200 = 13.3%
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