Question

Sager Industries is considering an investment in equipment that will replace direct labor. The equipment has a cost of $86,000 with a $7,000 residual value and a 10-year life. The equipment will replace three employees who has an average total wages of $15,810 per year. In addition, the equipment will have operating and energy costs of $4,190 per year. Determine the average rate of return on the equipment, giving effect to straight-line depreciation on the investment.

Answer 1

130.77%

Step-by-step explanation:

depreciation expense per year using straight method = (purchase cost - salvage value) / useful life = ($86,000 - $7,000) / 10 = $7,900

total costs = depreciation expense + operating and energy costs = $7,900 + $4,190 = $12,090

average rate of return = total savings / total costs = $15,810 / $12,090 = 1.30769 = 130.77%