Question

1. 1. A) Select the themes of design using Return on Investment ROI (Rate of Return) method, the data of both equipment are shown the table below,

B) Compare the effect of decrease in initial cost of 5% on the rate of return for equipment A (calculate the % of change in ROI).  

	Theme I	Theme II
Initial cost (OR)	75000	81000
Annual revenues (OR/yr)	24000	24000
O&M annual cost ((OR/yr)	5400	2700
Salvage value (OR)	2700	5400
Useful life (Years)	7	9

Answer 1

1 A)

Net Return on investment computation

	Theme 1	Theme 2
Annual revneues	24,000.00	24,000.00
Less : Annual O&M Cost	5,400.00	2,700.00
Annual operating return	18,600.00	21,300.00
Useful life (in years)	7.00	9.00
Total operating return on investment --> Annual operating return x useful life	130,200.00	191,700.00
Add : Salvage value	2,700.00	5,400.00
Less : Initial cost	75,000.00	81,000.00
Net return on investment	57,900.00	116,100.00

Return on investment computation

	Theme 1	Theme 2
Net return on investment	57900	116100
Initial cost	75000	81000
Return on investment ---> Total return on investment / Cost of investment	77%	143%

Net Return on investment computation with decrease in initial cost by 5%

Revised Initial cost computation

	Theme 1	Theme 2
Original cost	75,000.00	81,000.00
Less : Decrease in cost by 5%---> (Original cost x 5%)	3,750.00	4,050.00
Revised initial cost	71,250.00	76,950.00

Revised Net return

	Theme 1	Theme 2
Annual revenues	24,000.00	24,000.00
Less : Annual O&M Cost	5,400.00	2,700.00
Annual operating return	18,600.00	21,300.00
Useful life (in years)	7.00	9.00
Total operating return on investment --> Annual operating return x useful life	130,200.00	191,700.00
Add : Salvage value	2,700.00	5,400.00
Less : Initial cost	71,250.00	76,950.00
Net return on investment	61,650.00	120,150.00

Return on investment computation

	Theme 1	Theme 2
Net return on investment	61650	120150
Initial cost	71,250.00	76,950.00
Return on investment ---> Total return on investment / Cost of investment	87%	156%

% Change in ROI

	Theme 1	Theme 2
Original ROI	77%	143%
Revised ROI	87%	156%
Change in ROI (Revised ROI - Original ROI)	9%	13%
% Change in ROI --> Change in ROI / Original ROI	12%	9%

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