Question

Franklin Painting Company is considering whether to purchase a new spray paint machine that costs $4,800. The machine is expected to save labor, increasing net income by $720 per year. The effective life of the machine is 15 years according to the manufacturer’s estimate. Required Determine the unadjusted rate of return based on the average cost of the investment

Answer 1

Answer:

rate of return: 16.67%

Explanation:

unadjusted rate of return

$\frac{average \: return}{average \: investment}$

Average investment

Assuming no salvage value:

(beginning investment + ending investing)/2

(4,800 + 0 )/ 2 = 2,400

cost savings: 720

depreciation: 4,800 / 15 = 320

average  return 400

400/2400 = 16.67%