Pocket Pilot Inc. is considering an investment in new equipment that will be use

Question

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 6,800 units at $320.00 per unit. The equipment has a cost of $569,200, residual value of $42,800, 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 $54.00 Direct materials 211.00 Factory overhead (including depreciation) 36.55 Total cost per unit $301.55 Determine the average rate of return on the equipment. If required, round to the nearest whole percent.

I got 23 % But it was marked wrong (Please show work so I can see where I went wrong) Thank You :)

Explanation / Answer

Annual income = Total revenues - Total costs = 6,800 ( $ 320 - $ 301.55 ) = $ 125,460

Net investment in the equipment = $ 569,200 - $ 42,800 = $ 526,400

Average net investment in the equipment = $ 526,400 / 2 = $ 263,200

Average rate of return on the equipment = Annual income / Average investment = 125,460 / 263,200 = 47.67% or 48%

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