Average Rate of Return A method of evaluating capital investment proposals that

Question

Average Rate of Return

A method of evaluating capital investment proposals that focuses on the expected profitability of the investment.

—Cost Savings

Master Fab Inc. is considering an investment in equipment that will replace direct labor. The equipment has a cost of $136,000 with a $12,000 residual value and a 10-year life. The equipment will replace one employee who has an average wage of $34,510 per year. In addition, the equipment will have operating and energy costs of $6,570 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

Master Fab Cash Flow net investment 136000 life 10 salvage value 12000 Saving -Employee 34510 less costs 6570 Less depreciation 12400 EBT 15540 Add back depreciation 12400 cash inflow 27940 ARR-Master Fab cash inflow 27940 net investment 1,36,000 Average rate of return 21%

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