Master Fab Inc. is considering an investment in equipment that will replace dire
ID: 2498251 • Letter: M
Question
Master Fab Inc. is considering an investment in equipment that will replace direct labor. The equipment has a cost of $139,000 with a $12,000 residual value and a five-year life. The equipment will replace one employee who has an average wage of $51,695 per year. In addition, the equipment will have operating and energy costs of $13,460 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 Income / Average Investment Annual Depreciation= (Equipment cost -Salvage Value)/5 (139000-12000)/5 25400 Average Accounting Profit = ( 51,695 - 13,460 -25,400) 12,835 Average rate of return= =12,835/139,000 9.23%