Average Rate of Return—New Product Pocket Pilot Inc. is considering an investmen

Question

Average Rate of Return—New Product Pocket Pilot Inc. is considering an investment in new equipment that will be used to manufacture a mobile communications device. The device is expected to generate additional annual sales of 5,300 units at $268.00 per unit. The equipment has a cost of $542,200, residual value of $40,800, and an eight-year life. The equipment can only be used to manufacture the device. The cost to manufacture the device is shown below. Cost per unit: Direct labor $46.00 Direct materials 179.00 Factory overhead (including depreciation) 30.90 Total cost per unit $255.90 Determine the average rate of return on the equipment. If required, round to the nearest whole percent. %

Explanation / Answer

Answer:

Average Rate of Return = Annual Average Net INcome after depreciation and taxes / Average Investment x 100

Calculation of Average Annual Net Income after depreciation and taxes

Annual Sales (5300*268)

$1,420,400

Less: Total Cost (including depreciation) (5300*255.9)

-$1,356,270

Annual Income after tax and depreciation

$64,130

Average Investment = (Initial Cost + Salvage Value) / 2 = (542,200 + 40,800) / 2 = 291,500

Average Rate of Return = $64,130 / $291,500 x 100 = 22%

Average Rate of Return also calculated based on initial investment = $64,130 / $542,200 x 100 = 11.83%

Annual Sales (5300*268)

$1,420,400

Less: Total Cost (including depreciation) (5300*255.9)

-$1,356,270

Annual Income after tax and depreciation

$64,130

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