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 $104,000 with a $9,000 residual value and a 10-year life. The equipment will replace one employee who has an average wage of $22,450 per year. In addition, the equipment will have operating and energy costs of $5,040 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. 0 8

Explanation / Answer

Calculate average rate of return :

Average investment = (104000+9000)/2 = 56500

Straight line dep = (104000-9000)/10 = 9500 per year

Annual saving = (22450-9500-5040) = 7910

Average rate of return = 7910*100/56500 = 14%

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