Average Rate of Return—Cost Savings Maui Fabricators Inc. is considering an investment in equipment that will replace direct labor. The equipment has a cost of $89,000 with a $8,000 residual value and a ten-year life. The equipment will replace one employee who has an average wage of $21,605 per year. In addition, the equipment will have operating and energy costs of $4,290 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.
Depreciation = cost-salvage / number of years
=$89,000-8,000 /10
=$81,000/10
$8,100
Average annual income = cost saved-depreciation-additional cost
=$21,605-$8,100-$4,290
=$9,215
Average investment = investment at the beginning+Average investment at the end /2
=[$89,000+$8,000]/2
=$48,500
Average rate of return = [$9,215/$48,500]*100
=19%
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