1. average rate of return?cost savings midwest fabricators inc. is considering an investment in equipment that will replace direct labor

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: Midwest Fabricators Inc.

Answer:
To determine the average rate of return (ARR) for the equipment investment by Midwest Fabricators Inc., we need to follow a structured approach. The ARR is calculated using the formula:

\text{ARR} = \left( \frac{\text{Average Annual Profit}}{\text{Average Investment}} \right) \times 100

Step-by-Step Solution

1. Calculate Straight-Line Depreciation Expense:

The straight-line depreciation method spreads the cost of the asset equally over its useful life, minus its residual value.

\text{Depreciation Expense} = \frac{\text{Cost of Equipment} - \text{Residual Value}}{\text{Useful Life}}

Given:

  • Cost of Equipment: $108,000
  • Residual Value: $9,000
  • Useful Life: 5 years
\text{Depreciation Expense} = \frac{108,000 - 9,000}{5} = \frac{99,000}{5} = 19,800

2. Calculate Annual Cost Savings:

The equipment will replace the salary of one employee and incur operating and energy costs.

Given:

  • Annual Wage of Employee: $41,405
  • Annual Operating and Energy Costs: $10,490
\text{Annual Cost Savings} = 41,405 - 10,490 = 30,915

3. Calculate Average Annual Profit:

The annual profit is the annual cost savings minus the annual depreciation expense.

\text{Average Annual Profit} = 30,915 - 19,800 = 11,115

4. Calculate Average Investment:

Since we use straight-line depreciation, the average investment is the initial investment plus the residual value divided by two.

\text{Average Investment} = \frac{\text{Cost of Equipment} + \text{Residual Value}}{2}
\text{Average Investment} = \frac{108,000 + 9,000}{2} = \frac{117,000}{2} = 58,500

5. Calculate the Average Rate of Return:

\text{ARR} = \left( \frac{11,115}{58,500} \right) \times 100
\text{ARR} \approx 18.99 \% \approx 19\%

Final Answer:
The average rate of return on the equipment investment for Midwest Fabricators Inc. is approximately 19%.

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

Answer:
To determine the average rate of return (ARR) for the investment in new equipment by Galactic Inc., we would follow a similar structured approach as outlined above. However, since the specific details for this investment are not provided, the steps would be:

  1. Calculate the straight-line depreciation expense for the new equipment.
  2. Calculate the annual cost savings or income generated by the new product.
  3. Subtract the annual depreciation expense from the annual savings or income to get the average annual profit.
  4. Calculate the average investment.
  5. Determine the ARR using the formula:
\text{ARR} = \left( \frac{\text{Average Annual Profit}}{\text{Average Investment}} \right) \times 100

Without specific numbers for Galactic Inc., a precise calculation isn’t possible, but the method remains consistent with the example provided for Midwest Fabricators Inc.

Please provide the necessary details, and I would be glad to calculate the ARR for Galactic Inc.