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

Question

6.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 $82,000 with a $7,000 residual value and a five-year life. The equipment will replace one employee who has an average wage of $30,515 per year. In addition, the equipment will have operating and energy costs of $7,950 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(ARR) = ( Average Net Income / Average Investment ) * 100

Income = Savings in Cost = $30,515 every year

Depreciation = Cost - Salvage Value / Estimated Life

                       = 82,000 - 7,000 / 5 = 75,000 / 5 = $15,000 per year

So Average Net Income = 30,515 - 15,000 = $15,515

ARR = (15,515 / 82,000) * 100 = 18.92%

Related Questions

Navigate

• Browse (All)
• Browse 6
• Subjects

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