Question

The management of Ballard MicroBrew is considering the purchase of an automated bottling machine for $61,000. The machine would replace an old piece of equipment that costs $15,000 per year to operate. The new machine would cost $6,000 per year to operate. The old machine currently in use could be sold now for a scrap value of $20,000. The new machine would have a useful life of 10 years with no salvage value.

Required:
Compute the simple rate of return on the new automated bottling machine.

Answer 1

Answer:

The simple rate of return on the new automated bottling machine is 7.07%

Explanation:

Consider the following formula to compute the result

Annual incremental Net operating income/Initial investment =Simple rate of return

(15000-6000-6100)/(61000-20000)

2900/41000=0.07073

7.07%