Question & Answer: Average Rate of Return Cost Savings Master Fab Inc. is considering an inv…..

Average Rate of Return Cost Savings Master Fab Inc. is considering an investment in equipment that will replace direct labor. The equipment has a cost of $100,000 with a $9,000 residual value and a 10-year life. (Residual value means the company expects to sell the equipment for that amount at the end of its useful life.) The equipment will replace one employee who has an average wage of $18,280 per year. In addition, the equipment will have operating and energy costs of $4,820 per year, not including depreciation. Determine the average rate of return on the equipment, giving effect to straight-line depreciation on the investment. (Refer back to Chapter 7, if necessary, to remember how to calculate straight-line depreciation.) The equipment’s annual income is its savings in wages expense less the annual depreciation and operating costs. (Saving wages expense increases net income.) %