Requirements:
No. | Particulars | |
1. | Depreciation expense | $5500 |
2. | Incremental net operating income | $2500 |
3. | Initial Investment | $35000 |
4. | Simple rate of return | 7.1% |
1) Computation of annual depreciation expense associated with the new bottling machine
Depreciation expense
=Cost of the new machine/useful life
=$55000/10
=$5500
2) Computation of the annual net operating income provided by the new bottling machine
Incremental net operating income
=Operating costs of old machine - Operating costs of new machine - annual depreciation
=$14000-$6000-$5500
=$2500
3) Computation of the amount of initial investment associated with the project
Initial investment
=Cost of new machine- Salvage value of old machine
=$55000-$20000
=$35000
4) Computation of the simple rate of return for the new bottling machine
Simple rate of return
=Annual incremental net operating income/Initial investment
=$2500/$35000
=7.1%
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