Question

Galactic Inc. is considering an investment in new equipment that will be used to manufacture a smartphone. The phone is expected to generate additional annual sales of 6,000 units at $250 per unit. The equipment has a cost of $850,000, residual value of $50,000, and an eight-year life. The equipment can only be used to manufacture the phone. The cost to manufacture the phone follows: Cost per unit: Direct labor $ 15.00 Direct materials 134.00 Factory overhead (including depreciation) 33.50 Total cost per unit $182.50 Determine the average rate of return on the equipment. If required, round to the nearest whole percent.

Answer 1

Average Rate of Return on Equipment

($250 - $182.50) * 6000 = $405,000

($850,000 + $50,000/2) = $450,000

Rate of Return in the nearest whole percent is:

$405,000/$450,000 = 90%

Answer 2

Average Return = 63.125%

Explanation:

With the provided information we have,

Total cost of investment = $850,000

Salvage value = $50,000

Expected life = 8 years

Depreciation as per straight line method = $100,000

i.e.
`(850,000 - 50,000)/(8) = 100,000`

Sales Revenue = $250 per unit for 6,000 units = $1,500,000

Less: Costs Excluding depreciation as the return is to be calculated based on cost of equipment.

Less: Total cost = (182.50
`*` 6,000) - $100,000 depreciation

= $995,000

Thus: return = $505,000

Average investment = $850,000 in beginning and $750,000 in year end.

thus average = $800,000

Average return = $505,000/$800,000 = 63.125%