Average Rate of Return—Cost Savings
Midwest Fabricators Inc. is considering an investment in equipment that will replace direct labor. The equipment has a cost of $102,000 with a $9,000 residual value and a five-year life. The equipment will replace one employee who has an average wage of $34,010 per year. In addition, the equipment will have operating and energy costs of $9,860 per year.
Determine the average rate of return on the equipment, giving
effect to straight-line depreciation on the investment. If
required, round to the nearest whole percent.
|Net annula average income from equipment|
|Saving in labor cost||$ 34,010|
|Operating & Energy cost||$ 9,860|
|Net saving||$ 24,150|
|Net Income||$ 5,550|
|= (Cost+ salvage value )/2|
|the average rate of return on the equipment = Net annual income / average investment|
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