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

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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What is the average rate of return for the investment in equipment by Midwest Fabricators Inc.?

Answer:
Midwest Fabricators Inc. is evaluating an investment in equipment that will replace direct labor. The equipment in question has a cost of $108,000, with a residual value of $9,000 and a five-year life span. It will be replacing an employee with an annual wage of $41,405, and will also incur operating and energy costs of $10,490 per year.

To calculate the average rate of return (ARR) on this investment, we need to consider the annual cash savings and costs associated with the equipment. The key components are the cost savings from replacing direct labor, the operating and energy costs, and any depreciation involved.

  1. Annual Cash Savings:

    • Cost savings from replacing one employee: $41,405
    • Operating and energy costs: $10,490
    • Total annual cash savings: $41,405 + $10,490 = $51,895

  2. Depreciation Calculation:

    • Depreciation per year = (Cost of the equipment - Residual value) / Useful life
    • Depreciation per year = ($108,000 - $9,000) / 5 = $19,800

  3. Net Annual Cash Flow:

    • Net cash flow per year = Total annual cash savings - Depreciation
    • Net cash flow per year = $51,895 - $19,800 = $32,095

  4. Average Rate of Return Calculation:

    • Average Rate of Return (ARR) = Average Profit / Initial Investment x 100%
    • Average Profit = Total Net Cash Flow over the investment’s life
    • Initial Investment = Cost of the equipment

Plugging in the values:

  • Average Profit = (Net cash flow x number of years) + Residual value
  • Average Profit = ($32,095 x 5) + $9,000 = $177,475
  • ARR = ($177,475 / $108,000) x 100% = 164.43%

Therefore, the average rate of return on the equipment investment, considering straight-line depreciation, is approximately 164.43%.

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