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 botting machine for $71,000. The machine would replace an old piece of equipment that costs $18,000 per year to operate. The new machine would cost $8,000 per year to operate. The old machine currently in use is fully depreciated and could be sold now for a scrap value of $26,000. 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

Calculation of simple rate of return on the new automated bottling machine Simple Rate of return Choose Numerator / Choose Denominator = Simple Rate of return Saving in Operating Cost / Cost of new automated bottling machine less scarp value of old machine = Simple Rate of return $10,000 / $45,000 = 22.22% Saving in operating cost = Operating cost of old machine - Operating cost of new machine = $18000 - $8000 = $10000

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