1. average rate of return?cost savings midwest fabricators inc. is considering an investment in equipment that will replace direct labor. the equipment has a cost of $108,000 with a $9,000 residual value and a five-year life. the equipment

General
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  1. average rate of return?cost savings midwest fabricators inc. is considering an investment in equipment that will replace direct labor. the equipment has a cost of $108,000 with a $9,000 residual value and a five-year life. the equipment will replace one employee who has an average wage of $41,405 per year. in addition, the equipment will have operating and energy costs of $10,490 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. % 2. average rate of return?new product galactic inc. is considering an investment in new equipment that will be used to manufacture
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1. Average Rate of Return for Midwest Fabricators Inc:

Question:
What is the average rate of return on the equipment investment for Midwest Fabricators Inc?

Answer:
Midwest Fabricators Inc is evaluating an equipment investment that will replace direct labor. The equipment’s details are as follows:

  • Cost of the equipment: $108,000
  • Residual value: $9,000
  • Life of the equipment: 5 years
  • Annual wage of the employee being replaced: $41,405
  • Annual operating and energy costs: $10,490

To calculate the average rate of return, we need to consider the annual savings and costs associated with the equipment. The annual savings from replacing the employee would be the wage saved, which is $41,405. The operating and energy costs are $10,490 per year.

The annual depreciation of the equipment can be calculated as follows:
Depreciation = (Cost of Equipment - Residual Value) / Life of Equipment
Depreciation = ($108,000 - $9,000) / 5
Depreciation = $99,000 / 5
Depreciation = $19,800 per year

The total annual cash inflow is the sum of wage savings and depreciation, which is $41,405 + $19,800 = $61,205.

The total annual cash outflow is the operating and energy costs, which is $10,490.

Average annual rate of return = [(Total Annual Cash Inflow - Total Annual Cash Outflow) / Initial Investment] * 100
Average annual rate of return = [($61,205 - $10,490) / $108,000] * 100
Average annual rate of return = ($50,715 / $108,000) * 100
Average annual rate of return = 0.469 * 100
Average annual rate of return ≈ 46.9%

Therefore, the average rate of return on the equipment investment for Midwest Fabricators Inc is approximately 46.9%.

If the value needs to be rounded to the nearest whole percent, it would be 47%.

This calculation takes into account the wage savings, depreciation, and operating costs associated with the equipment investment.