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 $89,000. The machine would replace an old piece of equipment that costs $36,000 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 $9,000. The new machine would have a useful life of 10 years with no salvage value. Required: Compute the simple rate of return on the new automated bottling machine.

Explanation / Answer

Operating Cost of Old Machine        36,000.00 Less Operating cost of new machine        17,000.00 Less Annual depreciation (89000/10)          8,900.00 Annual Incremental Net operating income        10,100.00 Cost of new Machine        89,000.00 Scrap value of old machine          9,000.00 Initial Investment        80,000.00 Simple rate of return = Annual Net operating inc/Initial invt Simple rate of return = 10,100/80,000 Simple rate of return = 12.63%

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