I-Mobile Inc. is considering an investment in new equipment that will be used to
ID: 2349367 • Letter: I
Question
I-Mobile Inc. is considering an investment in new equipment that will be used to manufacture a mobile communications device. The device is expected to generate additional annual sales of 2,100 units at $370 per unit. The quipment has a cost of $920,000, residual value of $88,000, and an eight year life. The equipment can only be used to manufacture the device. The cost to manufacture the devise is shown below:
Cost per unit:
Direct labor: 45.00
Direct materials: 170.00
Factory overhead (including depreciation) 35.00
Total cost per unit: 250.00
Determine the average rate of return on the equipment.
Explanation / Answer
Average investment = (920000 + 88000)/2 = $504,000 Average annual profit = 2100 x (370 - 250) = $252000 Average rate of return = 252000/504000 = 50.0% Hope this helps!