Average Rate of Return—Cost Savings Master Fab Inc. is considering an investment

Question

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 $101,000 with a $9,000 residual value and a five-year life. The equipment will replace one employee who has an average wage of $36,400 per year. In addition, the equipment will have operating and energy costs of $9,750 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.

Explanation / Answer

the average rate of return on the equipment =8250/55000 =15%

Average investment =(101000+9000)/2=46000

Net Gain on Investment Saving in average Wages 36400 Less opeating Cost 9750 Less Depreciation (101000-9000)/5 18400 Net Gain on Investment 8250

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