Question

Hana 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 4,900 units at $198 per unit. The equipment has a cost of $546,800, residual value of $41,200, and an 8-year life. The equipment can only be used to manufacture the phone. The cost to manufacture the phone follows:

Cost per unit:
Direct labor $32.00
Direct materials 126.00
Factory overhead (including depreciation) 22.00
Total cost per unit $180.00
Determine the average rate of return on the equipment. If required, round to the nearest whole percent.
fill in the blank 1

Answer 1

The average rate of return on the equipment is 16.15%

Step-by-step explanation:

To determine the average rate of return on the equipment, we can use the formula: (Annual Cash Inflows - Annual Cash Outflows) / Initial Investment cost. In this case, the annual cash inflows are the additional annual sales of the smartphone, which is 4,900 units at $198 per unit.

So the annual cash inflows are 4900 x $198 = $970,200. The annual cash outflows include the direct labor, direct materials, and factory overhead costs per unit, which sum up to $180 per unit.

So the annual cash outflows are 4900 x $180 = $882,000.

Now, let's calculate the average rate of return: (970,200 - 882,000) / 546,800 = 0.1615 (rounded to four decimal places). Multiply this by 100 to convert to a percentage: 0.1615 x 100 = 16.15%.