Cha 13 EXR Quest 5 The management of Ballard MicroBrew is considering the purcha
ID: 2596282 • Letter: C
Question
Cha 13 EXR Quest 5
The management of Ballard MicroBrew is considering the purchase of an automated bottling machine for $58,000. The machine would replace an old piece of equipment that costs $15,000 per year to operate. The new machine would cost $6,000 per year to operate. The old machine currently in use is fully depreciated and could be sold now for a salvage value of $20,000. The new machine would have a useful life of 10 years with no salvage value.
Required:
1. What is the annual depreciation expense associated with the new bottling machine?
2. What is the annual incremental net operating income provided by the new bottling machine?
3. What is the amount of the initial investment associated with this project that should be used for calculating the simple rate of return?
4. What is the simple rate of return on the new bottling machine? (Round your answer to 1 decimal place i.e. 0.123 should be considered as 12.3%.)
1. Depreciation expense 2. Incremental net operating income 3 Initial investment 4. Simple rate of return %Explanation / Answer
1 CALCULATION OF ANNUAL DEPRECIATION EXPENSE A Cost of new bottling machine $58,000 B Useful life in years 10 C Salvage Value $0 D=(A-C)/B Annual depreciation expense $5,800 2 CALCULATION OF INCREMENTAL NET OPERATING INCOME E Annual operating cost of old machine $15,000 F Annual operating cost of new machine $6,000 G=E-F Incremental net operating income $9,000 3 CALCULATION OF INITIAL INVESTMENT FOR THIS PROJECT H Cost of the new machine $58,000 I Salvage value of old machine $20,000 J=H-I Initial investment for the project $38,000 4 CALCULATION OF SIMPLE RETURN K Initial investment for the project $38,000 L Incremental net operating income $9,000 M=L/K Simple Return 0.236842 N=M*100 Simple Return in percentage 23.68% 1 Depreciation expense $5,800 2 Incremental net operating income $9,000 3 Initial investment $38,000 4 Simple rate of return 23.68%