Question

Exercise 13-6 Simple Rate of Return Method (LO13-6) The management of Ballard MicroBrew is considering the purchase of an automated bottling machine for $57,000. The machine would replace an old piece of equipment that costs $15,000 per year to operate. The new machine would cost $7,000 per year to operate. The old machine currently in use is fully depreciated and could be sold now for a salvage value of $24,000. The new machine would have a useful life of 10 years with no salvage value. Required: 1. What is the annual depreciation expense associated with the new bottling machine? 2. What is the annual incremental net operating income provided by the new bottling machine? 3. What is the amount of the initial investment associated with this project that should be used for calculating the simple rate of return? 4. What is the simple rate of return on the new bottling machine? (Round your answer to 1 decimal place i.e. 0.123 should be considered as 12.3%.) 1. Depreciation expense Incremental net operating income Initial investment Simple rate of return 4.

Answer 1

1. Annual depreciation expense associated with the new bottle machine.

​​​​​ Given that, cost of new machine = $57000

And its useful life = 10 years

No salvage value

Annual depreciation = ( cost of new machine ÷ useful life ) = ($57000÷10) = $5700.

​​​​​​

2. Annual incremental net operating income.

Operating cost of old machine. = $15000

Less : Operating cost of new machine. = ($7000)

Less : Annual depreciation of new machine. = ($5700)

_________

Annual incremental net operating income. = $2300

3. Amount of initial investment

= Cost of new machine - scrap value of old machine = $57000 - $24000 = $33000.

​​​4. Simple Rate of Return

= (Annual incremental net operating income ÷ initial investment)×100

= ($2300 ÷ $33000)×100 = 6.97%

_____×_____

All the best,

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