Question

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

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 Less: Operating & Energy cost \$         9,860 Net saving \$       24,150 Less: Depreciation 18600 (\$102000-9000)/5 Net Income \$         5,550 Average investment = (Cost+ salvage value )/2 =(\$102000+9000)/2 =\$55500 the average rate of return on the equipment = Net annual income / average investment =\$5550/55500 10.00%

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