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 $55,000. 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 $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 Retu Simple rate of return Hints References eBook& Resources Hint 1 MacBook Air FI OL F3 FS 0 2

Explanation / Answer

Sol: Operating Cost of Old machine 15,000 Less: Operating Cost of New machine 7,000 Less: Annual depreciation of new machine 55000/10 = 5,500 Annual Incremental net operating Income 15000-(7000+5500) = 2500 Cost of the new machine 55,000 Scrap value of old machine 26,000 Initial Investment 55000-26000 = 29,000 Simple Rate of return Choose Numerator / Choose Denominator = Simple Rate of Return Net Operating Income / Initial Investment = Simple Rate of Return 2500 / 29000 = 8.62% Answer Please let me know for any clarifications

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