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 $67,000. The machine would replace an old piece of equipment that costs $18,000 per year to operate. The new machine would cost $8,000 per year to operate. The old machine currently in use could be sold now for a scrap value of $29,000. 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.

Choose Numerator / Choose Denominator = Simpe Rate Of Return

______ / _______ = ____%

Explanation / Answer

Increase in net income = Annual Savings - Depreciation = ($18,000 - $8,000) - ($67,000 / 10) = $3,300

Investment = $67,000 - $29,000 = $38,000

Therefore,

Simple Rate of Return = Increase in net income / Investment = $3,300 / $38,000 = 8.7%

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