The management of Wallingford MicroBrew is considering the purchase of an automa

Question

The management of Wallingford MicroBrew is considering the purchase of an automated bottling machine for $73,600. The machine would replace an old piece of equipment that costs $40,000 per year to operate. The new machine would cost $17,000 per year to operate. The old machine currently in use could be sold now for a scrap value of $11,000. The new machine would have a useful life of 8 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.)

Explanation / Answer

Operating Cost of Old Machine                            40,000.00 Less Operating cost of new machine                            17,000.00 Less Annual depreciation (73600/8)                              9,200.00 Annual Incremental Net operating income                            13,800.00 Cost of new Machine                            73,600.00 Scrap value of old machine                            11,000.00 Initial Investment                            62,600.00 Simple rate of return = Annual Net operating inc/Initial invt Simple rate of return = 13,800/62,600 Simple rate of return = 22.04%%

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