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 $59,000. The machine would replace an old piece of equipment that costs $15,000 per year to operate. The new machine would cost $7,000 per year to operate. The old machine currently in use is fully depreciated and could be sold now for a scrap value of $25,000. The new machine would have a useful life of 10 years with no salvage value. Required: Compute the simple rate of return on the new automated bottling machine Simple rate of return Choose Numerator: I Choose Denominator:Simple Rate of Return -Simple rate of return

Explanation / Answer

Operating cost of old machine 15000 Less operating cost of new machine 7000 Less annual depreciation on the new machine 5900 =(59000/10) Annual incremental net operating income 2100 Initial investment=59000-25000= 34000 Simple rateof return = Annual incremental net operating income/Initial investment = 2100/34000= 6.2%

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