Master Fab Inc. is considering an investment in equipment that will replace dire
ID: 2456169 • Letter: M
Question
Master Fab Inc. is considering an investment in equipment that will replace direct labor. The equipment has a cost of $108,000 with a $9,000 residual value and a five-year life. The equipment will replace one employee who has an average wage of $41,990 per year. In addition, the equipment will have operating and energy costs of $10,490 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
Depreciation = Cost- Salvage/ No of years = 108000-9000/5 19800 per year Savings in Wages 41990 Less: Expenses -10490 Less: Depreciation -19800 Net Savings 11700 Average Rate of Return = Net Income/ Initial Investment = 11700*100/108000 10.83% Average Rate of Return = 10.83%