Master Fab Inc. is considering an investment in equipment that will replace dire
ID: 2494830 • Letter: M
Question
Master Fab Inc. is considering an investment in equipment that will replace direct labor. The equipment has a cost of $97,000 with a $8,000 residual value and a 10-year life. The equipment will replace one employee who has an average wage of $18,870 per year. In addition, the equipment will have operating and energy costs of $4,720 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
Average rate of return = Average Accounting Profit / Average Investment
Annual depreciation = (97000 - 8000)/ 10 years life = $ 8900
Average Accounting Income = 18870 -4720 -8900 = $ 5250
Average rate of return = $5250 / 97000 = 5.41 % or 5%