Question

EXERCISE 12-6 Simple Rate of Return Method L012-60 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 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. 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?

Answer 1

1
Cost of machine	120000
Divide by useful life	10
Depreciation expense	12000
2
Operating cost of old machine	30000
Less: Operating cost of new machine	12000
Less: Annual depreciation on the new machine	12000
Annual incremental net operating income	6000
3
Cost of the new machine	120000
Less: Salvage value of old machine	40000
Amount of the Initial investment	80000
4
Annual incremental net operating income	6000
Divide by Initial investment	80000
Simple rate of return	7.50%