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 $79,000. The machine would replace an old piece of equipment that costs $19,000 per year to operate. The new machine would cost $8,000 per year to operate. The old machine currently in use is fully depreciated and could be sold now for a scrap value of $26,000. The new machine would have a useful life of 10 years with no salvage value. Required Compute the simple rate of retum on the new automated bottling machine. Simple rate of return Choose Numerator Choose Denominator: Simple Rate of Returrn Simple rate of return Hints References eBook &Resources;

Explanation / Answer

Answer

given

operating cost of old machine = 19000

less operating cost of new machine = 8000

less annual depreciation for the new machine = 79000 / 10 = 7900

annual incremental net operating income = 3100

cost of new machine = 79000

scrap value of old machine = 26000

initial investment = 53000

simple rate of interest = annual incremental income / intial investment

= 3100 / 53000

= 5.84 %

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