The management of Ballard MicroBrew is considering the purchase of an automated

Question

The management of Ballard MicroBrew is considering the purchase of an automated bottling machine for $55,000. The machine would replace an old piece of equipment that costs $14,000 per year to operate. The new machine would cost $6,000 per year to operate. The old machine currently in use could be sold now for a scrap value of $21,000. The new machine would have a useful life of 10 years with no salvage value.

Compute the simple rate of return on the new automated bottling machine.

The management of Ballard MicroBrew is considering the purchase of an automated bottling machine for $55,000. The machine would replace an old piece of equipment that costs $14,000 per year to operate. The new machine would cost $6,000 per year to operate. The old machine currently in use could be sold now for a scrap value of $21,000. The new machine would have a useful life of 10 years with no salvage value.

Explanation / Answer

$ Savings in cost by not using old machine 14000 Sale value of old machine 21000 Cost of using new machine -6000 Depreciation per year on new machine -5500 Benefit by using new machine 23500 If old machine was retained Costs incurred would be 14000 Numerator = Old Machine Costs Denominator = New Machine Costs Therefore, rate of return = 60%

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