Arrowhead Inc. is considering an investment in new equipment that will be used t

Question

Arrowhead Inc. is considering an investment in new equipment that will be used to manufacture a mobile communications product. The product is expected to generate additional annual sales of 7,100 units at $276.00 per unit. The equipment has a cost of $726,300, residual value of $54,700, and an 8-year life. The equipment only can be used to manufacture the product.

The cost to manufacture the product is shown below. Cost per unit: Direct labor $45.00 Direct materials 177.00 Factory overhead (including depreciation) 30.35 Total cost per unit $252.35

Determine the average rate of return on the equipment.

Explanation / Answer

Determine the average rate of return on the equipment.

Net income = (276-252.35)*7100 = 167915

Average invesment = (726300+54700/2) = 390500

Average rate of return = 167915*100/390500 = 43%

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