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 $24,000. 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: I Choose Denominator:Simple Rate of Return Simple rate of return

Explanation / Answer

Simple rate of return= (Cost saving-Depreciation on new machine)/Initial inventment, where the investment is reduced by any salvage from sale of old machine

= (15000-7000-5700)/(57000-24000)

=2300/33000= 6.97%

Cost saving = cost of old machine p.a.-cost of new machinep.a.

depreciation expense per year= 57000/10= 5700

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