The management of Ballard MicroBrew is considering the purchase of an automated
ID: 2568715 • Letter: T
Question
The management of Ballard MicroBrew is considering the purchase of an automated bottling machine for $61,000. The machine would replace an old piece of equipment that costs $15,000 per year to operate. The new machine would cost $6,000 per year to operate. The old machine currently in use is fully depreciated and could be sold now for a salvage value of $20,000. The new machine would have a useful life of 10 years with no salvage value.
Required:
1. What is the annual depreciation expense associated with the new bottling machine?
2. What is the annual incremental net operating income provided by the new bottling machine?
3. What is the amount of the initial investment associated with this project that should be used for calculating the simple rate of return?
4. What is the simple rate of return on the new bottling machine? (Round your answer to 1 decimal place.)
1 Depreciation expense ? 2 Incremental net operating income ? 3 Initial investment ? 4 Simple rate of return ? %Explanation / Answer
Req 1 Cost of new bottling plant $ 61000 Estimated life 10 years Salvage value Nil Annual Depreciation = Cost - Salvage value / estimated life (61,000 - 0) /10 = $ 6,100 Req 2: Net operating income Savings in annual operating cost: Annual Operating cost of existing machine 15,000 Less: Annual operating cost of proposed plant 6000 Savings in operating cost 9000 Less: Depreciation of new plant 6100 Annual incremental net operating income 2900 Req 3: Cost of new bottling plant 61,000 Less: Salvage value of old plant 20,000 Initial Investment required for proposed plant 41,000 Req 4: Simple rate of return = Annual incremental icome from proposed plant / Initial invenstment of plant *100 ( 2900 / 41000) *100 = 7.07% 1. Depreciation expense 6100 2. Annual incremental net operating income 2900 3. Initial investment 41000 4. Simple rate of return 7.07%
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