Question

The cfo of the fun factory is investigating the possibility of investing in a three-dimensional printer that would cost $23,500. the printer would eliminate the need to have prototypes of new toys be produced by a third party. the cost of having the prototypes manufactured by the third party is about $10,857 per year. the printer would have a useful life of five years with no salvage value with expected annual operating costs of $4,700 per year.

Compute the simple rate of return on the printer.

Answer 1

The simple rate of return on the three-dimensional printer investment is 26.2%, calculated by taking the net annual savings that result from eliminating third-party prototype costs ($6,157) and dividing by the initial cost of the printer ($23,500).

Step-by-step explanation:

To compute the simple rate of return on the three-dimensional printer, we need to first calculate the annual increase in revenue or decrease in costs that will result from the investment. In this case, since the printer eliminates the need for third-party prototypes, the savings can be considered as increased revenue. The annual savings are $10,857 (the cost of third-party prototypes). From this, we need to subtract the annual operating costs of the printer, which are $4,700. The net annual savings are therefore $10,857 - $4,700 = $6,157.

The simple rate of return is then calculated by taking the net annual savings and dividing it by the initial investment. So, the simple rate of return is $6,157 ÷ $23,500 = 0.262 or 26.2%.

The formula for the simple rate of return is:

Simple Rate of Return = (Annual Incremental Net Operating Income ÷ Initial Investment) x 100

Using the values we have:

Simple Rate of Return = ($6,157 ÷ $23,500) x 100 = 26.2%