Average Rate of Return—Cost Savings Master Fab Inc. is considering an investment

Question

Average Rate of Return—Cost Savings Master Fab Inc. is considering an investment in equipment that will replace direct labor. The equipment has a cost of $130,000 with a $11,000 residual value and a five-year life. The equipment will replace one employee who has an average wage of $49,805 per year. In addition, the equipment will have operating and energy costs of $12,610 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

Average rate of return = Average annual profit / Net investment in the project x 100 = 13,395 / 119,000 x 100 = 11.26%

Savings generated by equipment $ 49,805 Operating costs of equipment $ 12,610 Depreciation expense $ 23,800 Average annual profit $ 13,395

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