eBook Average Rate of Return—Cost Savings Master Fab Inc. is considering an inve
ID: 2500398 • Letter: E
Question
eBook
Average Rate of Return—Cost Savings
Master Fab Inc. is considering an investment in equipment that will replace direct labor. The equipment has a cost of $118,000 with a $10,000 residual value and a 10-year life. The equipment will replace one employee who has an average wage of $22,920 per year. In addition, the equipment will have operating and energy costs of $5,720 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
> (118,000-10,000)/10=10,800... every year the machine wore out value
> (118,,000+10,000)/2=64,000... average investment value
(machine can replace the employee's wage $22,920 but cost energy 5,720 and wore out 11,800)
> 22,920-5,720-10,800= 6,400...new machine can have profits
FINAL ANSWER: 5,400//64,000 = 10%
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