Question

The management of Ballard  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:

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)Depreciation = (Cost-Salvage)/usefullife

= 54000/10 = 5400

2)

Operating cost of old machine	14000
Less: Operating cost of new machine	(6000)
Less: Depreiation	(5400)
Annual incremental net operating income	2600

3)

Cost of new machine	54000
Less: Salvage value of old machine	(20000)
Amount of initial Investment	34000

4)

Annual incremental net operating income. A	2600
Amount of initial Investment. B	34000
Simple rate of return. A/B*100	7.65%