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 $57,000. 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 returr Choose Numerator: I Choose Denominator:Simple Rate of Return Simple rate of return

Explanation / Answer

SOLUTION

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

= $2,300 / $32,000

= 7.19%

Amount ($) Operating cost of old machine 15,000 Less: Operating cost of new machine (7,000) Less: Annual depreciation on the new machine ($57,000 / 10 years) (5,700) Annual incremental net operating income 2,300 Cost of the new machine 57,000 Scrap value of old machine (25,000) Initial investment 32,000

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