The management of Ballard MicroBrew is considering the purchase of an automated
ID: 2594070 • Letter: T
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 $14,000 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 scrap value of $20,000. The new machine would have a useful life of 10 years with no salvage value.
Compute the simple rate of return on the new automated bottling machine.
Choose Numerator / Choose Denominator = Simple Rate of Return
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 $14,000 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 scrap value of $20,000. The new machine would have a useful life of 10 years with no salvage value.
Explanation / Answer
Annual incremental net operating income = 14000-6000-(55000/10)= 2500 Initial investment = 55000-20000 = 35000 Simple rate of return = Annual incremental net operating income/Initial investment =2500/35000= 7.1%
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