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 $20,000. 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 $20,000. The new machine would have a useful life of 10 years with no salvage value.

Explanation / Answer

Depreciation of the new machine = 55000 / 10 = $5500

simple rate of return = ($14000 - $6000 - $5500) / ($55000 - $20000) = 7.14%

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