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 $78,400. The machine would replace an old piece of equipment that costs $36,000 per year to operate. The new machine would cost $18,000 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 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. Omit the "%" sign in your response.)

The management of Wallingford MicroBrew is considering the purchase of an automated bottling machine for $78,400. The machine would replace an old piece of equipment that costs $36,000 per year to operate. The new machine would cost $18,000 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 8 years with no salvage value.

Explanation / Answer

Hi,

Please find the answer as follows:

Annual Savings - Depreciation = (36000 - 18000) - 78400/8 = 8200

Simple Rate of Return = 8200/(78400 - 5000) = 11.17%

Thanks.

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