1). Master Fab Inc. is considering an investment in equipment that will replace

ID: 2473966 • Letter: 1

Question

1). Master Fab Inc. is considering an investment in equipment that will replace direct labor. The equipment has a cost of $135,000 with a $12,000 residual value and a 10-year life. The equipment will replace one employee who has an average wage of $30,580 per year. In addition, the equipment will have operating and energy costs of $6,520 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

Depreciation = (135,000 – 12,000)/10 = $12,300

Average investment = (initial cost +residual vaue)/2

= (135,000 +12,000)/2

=$73,500

Profit from new machine

Savings in employees salary

$30,580

Less:Cost per year

-6,520

Depreciation for the year

-12,300

Net income

11,760

Average rate of return = 11,760/73,500

=16%