Midwest Fabricators Inc. is considering an investment in equipment that will replace direct labor. The equipment has a cost of $138,000 with a $12,000 residual value and a ten-year life. The equipment will replace one employee who has an average wage of $29,780 per year. In addition, the equipment will have operating and energy costs of $6,680 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.

Question

Business

Makena Gates

5 August, 02:02

Midwest Fabricators Inc. is considering an investment in equipment that will replace direct labor. The equipment has a cost of $138,000 with a $12,000 residual value and a ten-year life. The equipment will replace one employee who has an average wage of $29,780 per year. In addition, the equipment will have operating and energy costs of $6,680 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.

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Matthew Marks · Answer 1

Average rate of return = 14 %

Explanation:

Average rate of return = Annual average return / Average Investment

Average investment = (Initial investment + scrap value) / 2

Average investment = 138,000 + 12,000/2 = 75,000

Average annual return = Savings in cost - energy cost - depreciation

Depreciation = (initial cost - scrap value) / 2 = (138,000 - 12,000) / 2 = 12600

Average annual return = 29,780-6,680-12600 = 10500

Average rate of return = 10,500/75,000 * 100 = 14 %

Average rate of return = 14 %