Question

Maui Fabricators Inc. is considering an investment in equipment that will replace direct labor. The equipment has a cost of $125,000 with a $15,000 residual value and an eight-year life. The equipment will replace one employee who has an average wage of $28,000 per year. In addition, the equipment will have operating and energy costs of $5,150 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

Answer:

average rate of return = 13 %

Explanation:

given data

equipment cost = $125,000

residual value = $15,000

time = 8 year

Annual Average wage = $28000

Annual operating and energy costs = $5,150

to find out

average rate of return

solution

first we get here depreciation expenses that is here as

Depreciation expense = ( equipment cost - residual value ) ÷ time period   .........1

Depreciation expense = $\frac{125000 - 15000}{8}$

Depreciation expense = $13750

so average annual income will be here as

average annual income = Annual Average wage - Depreciation expense  - Annual operating and energy costs    ....................2

average annual income = $28,000 - $13750 -$5150

average annual income = $9100

and average investment will be

average investment = $\frac{125000+15000}{2}$

average investment =  $70000

so average rate of return will be here as

average rate of return = $\frac{average\ annual\ income}{average\ investment}$    ..............3

average rate of return = $\frac{9100}{70000}$

average rate of return = 0.13

average rate of return = 13 %

Answer 2

Answer:

Average rate of return  13%

Explanation:

Given data:

cost of eqipment is $125,000

residual value is $15000

average wage of employee $28,000

energy cost is $5150 per year

Average rate of return $= \frac{Estimated \ Average\ annual\ income}{Average\ investment} \times 100$

depreciation expense $= \frac{125,000 - 15000}{8} = 13750$

Average annual income = 28000 - (13750 + 5150) = 9100

average investment $= \frac{125000 + 15000}{2} = 70,000$

Average rate of return $= \frac{9100}{70,000} \times 100 = 13\%$