Question

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.
%

Answer 1

	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%