Average Rate of Return Lakeland Company is considering the purchase of equipment for $175,000. The equipment...

Average Rate of Return

Lakeland Company is considering the purchase of equipment for $175,000. The equipment will expand the Company's production and increase revenue by $40,000 per year. Annual cash operating expenses will increase by $12,000. The equipment's useful life is 10 years with no salvage value. Lakeland uses straight-line depreciation. The income tax rate is 25%. What is the average rate of return on the investment?

Round answer to the nearest whole percentage, if applicable.

Average rate of return on investment %? I have the answer as .045 which would round to 5% but the answer keeps getting marked as incorrect.

Expert Solution

In order to calculate the average rate of return on investment, we use the following formula:-

Average Rate of return = Annual Net Income/Average Investment * 100

Average Investment = ($175,000 + $0)/2

Average Investment = $87,500

Calculation of Net income is calculated as follows:-

Particulars	Amount
Incremental Revenue	40,000
Less:- Operating expenses	(12,000)
Less:- Depreciation ($175,000/10 years)	(17,500)
Income before taxes	10,500
Less:- Income tax (25% * $10,500)	(2,625)
Net Income	7,875

Average Rate of Return = $7,875/$87,500

Average Rate of Return = 9%

Based on the calculation above, the average rate of return is 9%.

Please let me know if you have any questions via comments and all the best :) !

ekkarill92 answered 2 years ago

Average Rate of Return—New Product Galactic Inc. is considering an investment in new equipment that will...

Average Rate of Return—New Product Galactic Inc. is considering an investment in new equipment that will be used to manufacture a smartphone. The phone is expected to generate additional annual sales of 6,500 units at $269 per unit. The equipment has a cost of $604,500, residual value of $45,500, and an eight-year life. The equipment can only be used to manufacture the phone. The cost to manufacture the phone follows: Cost per unit: Direct labor $45.00 Direct materials 175.00 Factory...

Average Rate of Return—Cost Savings Midwest Fabricators Inc. is considering an investment in equipment that will...

Average Rate of Return—Cost Savings Midwest Fabricators Inc. is considering an investment in equipment that will replace direct labor. The equipment has a cost of $85,000 with a $7,000 residual value and a ten-year life. The equipment will replace one employee who has an average wage of $18,370 per year. In addition, the equipment will have operating and energy costs of $4,130 per year. Determine the average rate of return on the equipment, giving effect to straight-line depreciation on the...

King Company's required rate of return is 10%. The company is considering the purchase of three...

King Company's required rate of return is 10%. The company is considering the purchase of three machines, as indicated below. Consider each machine independently. (Ignore income taxes in this problem.) Machine A will cost $25,000 and will have a useful life of 15 years. Its salvage value will be $1,000 and cost savings are projected at $3,500 per year. Calculate the machine's net present value. How much should King Company be willing to pay for Machine B if the machine...

A company is considering purchasing new equipment. The purchase of the equipment is expected to...

A company is considering purchasing new equipment. The purchase of the equipment is expected to generate after tax savings of $12,600 each year for 8 years. The company can borrow money at 6%. Assume annual compounding. Determine the present value of the future cash inflows. Hint: the $12,600 are your annuity payments

Lakeland Company

EOQ for manufacturer. Lakeland Company, which produces lawn mowers, purchases 18,000 units of a rotor blade part each year at a cost of $60 per unit Lakeland requires a 15% annual rate of return on investment In addition, the relevant carrying cost (for insurance, materials handling, breakage, and so on) is $6 per unit per year The relevant ordering cost per purchase order is $150.1. Calculate Lakeland’s EOQ for the rotor blade part.2. Calculate Lakeland’s annual relevant ordering costs for...

You are considering the purchase of a home priced at $175,000, using 15% down.

You are considering the purchase of a home priced at $175,000, using 15% down. The rest will be financed at 4.29% over 360 months. What is your monthly payment expected to be?A) $853B) $1,187C) $735.25D) $556.7914) For the loan in #13, what is the loan constant?A) 5.93%B) 4.29%C) 8.17%D) 6.77%15) If there were 2 points and $790 in fees to the lender to be paid to obtain the interest rate in problem #13, what would be the APR of the...

What is the average accounting rate of return(APR) on a piece of equipment that will cost...

What is the average accounting rate of return(APR) on a piece of equipment that will cost $ 1.2 million and that will result in pretax cost savings of $380,000 for the first three years and then $280,000 for the following three years? Assume that the machinery will be depreciated to a salvage value of 0 over six years using the straight line method and the company’s tax rate if 32 percent. If the acceptance decision is based on the project...

A company is considering the purchase of some equipment. The equipment costs $1,600,000. It lasts for...

A company is considering the purchase of some equipment. The equipment costs $1,600,000. It lasts for 4 years, and would be depreciated straight line to a zero salvage value. Alternatively, the company could lease the equipment for 4 years. The leasing contract would include maintenance, and the lease payments would be due at the end of each of the four years. The company’s before-tax cost of debt is 10%. The tax rate is 40%. What is the breakeven lease payment...

The management of Electronics Company is considering to purchase an equipment to be attached with the...

The management of Electronics Company is considering to purchase an equipment to be attached with the main manufacturing machine. The equipment will cost $8,000. The useful life of the equipment is 4 years. Management projected that annual cash inflow for four(4) years as follow: year-1 $1,000, year-2 $3000, year-3 $3500 and year-4 $4000. There’s maintenance cost for the equipment, and management should expense: $600 on year-2 and $800 on year-4. The management wants a 14% return on all investments. a....

Sinclair Company* A. EQUIPMENT REPLACEMENT Sinclair Company is considering the purchase of new equipment to perform...

Sinclair Company* A. EQUIPMENT REPLACEMENT Sinclair Company is considering the purchase of new equipment to perform operations currently being performed on different, less efficient equipment. The purchase price is $250,000, delivered and installed. A Sinclair production engineer estimates that the new equipment will produce savings of $72,000 in labor and other direct costs annually, as compared with the present equipment. She estimates the proposed equipment’s economic life at five years, with zero salvage value. The present equipment is in good...

Question