Question

The management of Ballard MicroBrew is considering the purchase of an automated bottling machine for $54,000. The machine would replace an old piece of equipment that costs $14,000 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%.)**

Answer #1

1. What is the annual depreciation expense associated with the new bottling machine?

Depreciation = (Cost of the Machine - salvage value ) / Life = ( 54000 - 0 ) / 10 = 5400

2. What is the annual incremental net operating income provided by the new bottling machine?

Savings in Operating cost | |

Operating cost with old Machine | 14000 |

(-) Operating cost with new machine | 6000 |

Annual savings | 8000 |

(-) Additional depreciation | |

= 5400 - 0 | 5400 |

Net Operating Income |
2600 |

3. What is the amount of the initial investment

Cost of new machine | 54000 |

(-) Sale of old machine | 20000 |

Net Initial
Investment |
34000 |

4. What is the simple rate of return on the new bottling machine?

Simple rate of return = 2600 / 34000 * 100 =
**7.65%**

The management of Ballard MicroBrew is considering the purchase
of an automated bottling machine for $54,000. The machine would
replace an old piece of equipment that costs $14,000 per year to
operate. The new machine would cost $6,000 per year to operate. The
old machine currently in use 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:
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