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 $43,000. The machine would replace an old piece of equipment that costs $11,000 per year to operate. The new machine would cost $5,000 per year to operate. The old machine currently in use is fully depreciated and could be sold now for a scrap value of $17,000. 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: Choose Denominator: Simple Rate of Return = | Simple rate of return

Explanation / Answer

Annual saving ($11,000-$5,000) $   6,000 Less: Depreciation ($43,000/10) $ (4,300) Increase in net income $   1,700 Cost of machine $   43,000 Less: Scrap value $ (17,000) Investment $   26,000 Increase in net income / Investment = Simple rate of return $                                    1,700 / $          26,000 = 6.5%

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