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

Average rate of return 13%

Step-by-step 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
`= (Estimated \ Average\  annual\ income)/(Average\ investment) * 100`

depreciation expense
`= (125,000 - 15000)/(8) = 13750`

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

average investment
`= (125000 + 15000)/(2) = 70,000`

Average rate of return
`= (9100)/(70,000) * 100 = 13\%`

Answer 2

average rate of return = 13 %

Step-by-step 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 =
`(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 =
`(125000+15000)/(2)`

average investment = $70000

so average rate of return will be here as

average rate of return =
`(average\ annual\ income)/(average\ investment)` ..............3

average rate of return =
`(9100)/(70000)`

average rate of return = 0.13

average rate of return = 13 %