Exercise 13-6 Simple Rate of Return Method [LO13-6] The management of Ballard Mi

Question

Exercise 13-6 Simple Rate of Return Method [LO13-6] The management of Ballard MicroBrew is considering the purchase of an automated bottling machine for $120,000. The machine would replace an old piece of equipment that costs $30,000 per year to operate. The new machine would cost $12,000 per year to operate. The old machine currently in use is fully depreciated and could be sold now for a scrap value of $40,000. 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 Denominator: Simple Rate of Return Choose Numerator: Simple rate of return

Explanation / Answer

Annual Incremental cost savings ($30000-$12000) $18000

less. Annual incremental depriciation    $12000

Annual Incremental Net operating income $ 6000

Inital Investment = Cost of new machine - scrap value of old machine = 120000-40000 = $80000

Simple rate of return = Annual incremental net operating income/Initial Investment

Numerator = 6000

Denominator = 80000

Simple rate of return = 7.5%

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