1. Average Rate of Return—New Product Pocket Pilot Inc. is considering an invest
ID: 2583685 • Letter: 1
Question
1.
Average Rate of Return—New Product
Pocket Pilot Inc. is considering an investment in new equipment that will be used to manufacture a mobile communications device. The device is expected to generate additional annual sales of 4,600 units at $186.00 per unit. The equipment has a cost of $470,600, residual value of $35,400, and an eight-year life. The equipment can only be used to manufacture the device. The cost to manufacture the device is shown below.
Determine the average rate of return on the equipment. If required, round to the nearest whole percent.
2.
Average Rate of Return—Cost Savings
Master Fab Inc. is considering an investment in equipment that will replace direct labor. The equipment has a cost of $104,000 with a $9,000 residual value and a five-year life. The equipment will replace one employee who has an average wage of $41,500 per year. In addition, the equipment will have operating and energy costs of $10,070 per year.
Determine the average rate of return on the equipment, giving effect to straight-line depreciation on the investment. If required, round to the nearest whole percent.
Cost per unit: Direct labor $31.00 Direct materials 122.00 Factory overhead (including depreciation) 21.45 Total cost per unit $174.45Explanation / Answer
Average Rate of Return = Annual Profits
Average Investment
Step 1
Calculation of Depreciation
Depreciation = Cost of equipment - Salvage Value
Useful Life
= 470600 - 35400
8
= 54400/-
Step 2
Calculation of Annual Profit
Sales from the equipment (4600*186) = 855600
Manufacturing Cost (4600*174.45) = (802470)
(including Depreciation)
Annual Profit = 53130
Step 3
Calculation of Average Investment
Average Investment = 470600 + 35400
2
= 253000/-
Step 4
Calculation of ARR = Annual Profit
Average Investment
= 53130
253000
= 21%
Average Rate of Return = Annual Profits
Average Investment
Step 1
Calculation of Depreciation
Depreciation = Cost of equipment - Salvage Value
Useful Life
= 104000 - 9000
8
= 19000/-
Step 2
Calculation of Annual Profit
Saving of wages = 41500
Operating and Energy Cost = (10070)
Depreciation = (19000)
Annual Profit = 12430
Step 3
Calculation of Average Investment
Average Investment = 104000 + 9000
2
= 56500/-
Step 4
Calculation of ARR = Annual Profit
Average Investment
= 12430
56500
= 22%
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