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

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: Cost Savings for Midwest Fabricators Inc.

Answer:
To determine the average rate of return (ARR) for the equipment, we need to follow these steps:

Solution By Steps:

  1. Calculate Annual Depreciation:

    • The equipment cost is $108,000, the residual value is $9,000, and it has a useful life of five years.

    • Depreciation Expense = (Cost - Residual Value) / Useful Life

      \text{Depreciation Expense} = \frac{108,000 - 9,000}{5} = \frac{99,000}{5} = 19,800 \text{ dollars}

  2. Calculate Annual Savings from Replacing Labor:

    • The equipment replaces an employee with an annual wage of $41,405.

    • The operating and energy costs of the equipment are $10,490 per year.

    • Annual Savings = Wage Savings - Operating and Energy Costs

      \text{Annual Savings} = 41,405 - 10,490 = 30,915 \text{ dollars}

  3. Calculate Annual Accounting Income:

    • Annual Accounting Income = Annual Savings - Annual Depreciation

      \text{Annual Accounting Income} = 30,915 - 19,800 = 11,115 \text{ dollars}

  4. Calculate Average Investment:

    • Average Investment = (Cost + Residual Value) / 2

      \text{Average Investment} = \frac{108,000 + 9,000}{2} = \frac{117,000}{2} = 58,500 \text{ dollars}

  5. Calculate Average Rate of Return (ARR):

    • ARR = (Annual Accounting Income / Average Investment) * 100

      \text{ARR} = \left(\frac{11,115}{58,500}\right) \times 100 \approx 19 \%

Final Answer:
The average rate of return on the equipment, giving effect to straight-line depreciation on the investment, is approximately 19%.

2. Average Rate of Return: New Product for Galactic Inc.

Answer:
For Galactic Inc., we need more specific details about the cost of the new equipment, its residual value, useful life, the expected annual revenue from the new product, and any operating costs to calculate the average rate of return accurately. Generally, the methodology would follow the steps outlined in the previous solution: determining the annual depreciation, calculating net annual savings or revenue, and then using these to find ARR. If you provide those details, I can proceed with the calculations.