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Willingford MicroBrew: Computing the Simple Rate of Return

The management of Wallingford MicroBrew is considering the purchase of an automated bottling machine for \$93,500. The machine would replace an old piece of equipment that costs \$43,000 per year to operate. The new machine would cost \$13,000 per year to operate. The old machine currently in use could be sold now for a scrap value of \$5,000. The new machine would have a useful life of 11 years with no salvage value.

Required:

Compute the simple rate of return on the new automated bottling machine. Use straight-line depreciation method.(Round your percentage answer to one decimal place. Omit the "%" sign in your response.)

Simple rate of return %

Solution Preview

Simple rate of return = (Annual cost savings - Annual depreciation)/(Cost of new machine - salvage value of old machine)

The annual cost savings is:

Annual operating cost of old machine \$43,000
Annual operating cost of new machine ...

Solution Summary

This solution illustrates how to compute the simple rate of return on a project.

\$2.19