Respuesta :
1. Annual depreciation expense associated with the new bottling machine is $12,000
2. Annual incremental net operating income provided by the new bottling machine is $18,000
3. Amount of the initial investment associated with this project that should be used for calculating the simple rate of return is 7.5%
4. Simple rate of return on the new bottling machine is 7.5%
How to calculate the Rate of return?
The general formula to calculate the simple rate of return is written as,
SRR = [Cost savings - Depreciation]/ [Cost - Scrap value]
Here have know that the management of Ballard MicroBrew is considering the purchase of an automated bottling machine for $120,000. The machine would replace an old piece of equipment that costs $30,000 per year to operate. The new machine would cost $12,000 per year to operate. The old machine currently in use is fully depreciated and could be sold now for a salvage value of $40,000. The new machine would have a useful life of 10 years with no salvage value.
Here, we are required to determine the simple rate of return on the new automated bottling machine for Ballard MicroBrew.
So, before we begin, let us first define simple rate of return.
And we know that, Simple rate of return is a rate of return that measures the increase or decrease in the investment value thru passage of time.
So in order to calculate this one, then we can determine the simple rate of return, first we need to determine the amount of cost savings.
=> Equipment cost = New equipment cost - Cost savings
=> $30,000 - $12,000 = $18,000
Now, we have to determine the depreciation of the new equipment:
=> Depreciation = Useful life / Cost
=> $120,000/ 10 = $12,000
Now, we can determine the simple rate of return (SRR) on the new automated bottling machine:
=> [$18,000 - $12,000] / [$120,000 - $40,000]
=> 0.075× 100 = 7.5%
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