Question

The management of Ballard MicroBrew is considering the purchase of an automated bottling machine for $47,000. The machine would replace an old piece of equipment that costs $13,000 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 salvage value of $22,000. 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%.)

Answer 1

1
Cost of machine	47000
Divide by useful life	10
Depreciation expense	4700
2
Operating cost of old machine	13000
Less operating cost of new machine	6000
Less annual depreciation on the new machine	4700
Annual incremental net operating income	2300
3
Cost of the new machine	47000
Less: Salvage value of old machine	22000
Initial investment	25000
4
Annual incremental net operating income	2300
Divide by Initial investment	25000
Simple rate of return	9.2%