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Economics Book Apple Philosophy Link Sports and Society connect UA Student Center Portal Marketing St...S.ystem SONA Business in cademic Grades 11953 ACC212 Ma... Connect GoPlay444.com How can a marke r 13 Homework Assignment Exercise 13-6 Simple Rate of Return Method [L013-6] The management of Ballard MicroBrew is considering the purchase of an automated bottling 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 salvage value of $26,000. 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 i.e. 0.123 should be considered as 12.3%.) net 4. Simple rate of return Reference links

Explanation / Answer

This is a cost reduction project, so the simple rate of return would be computed as follows;

Operating cost of old machine ------------------------------------------------------ $18000

Less operating cost of new machine -------------------------------------------- ($8000)

Less annual depreciation on the new machine

($71000 ÷ 10 years) ------------------------------------------------------------- ($7100)

---------------------------

Annual incremental net operating income ---------------------------- $2900  

Cost of the new machine -------------------------------------------------- $71000

Scrap value of old machine ---------------------------------------------- ($26000)

------------------------------

Initial investment ---------------------------------------------- $45000

Simple rate of return = (Annual incremental net operating income / Initial investment) * 100

=(2900 / 45000) * 100

= 6.4%

  

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