Question

# Average Rate of Return—Cost Savings Maui Fabricators Inc. is considering an investment in equipment that will...

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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