Question

Chapter 12 Question 3:

The management of Ballard MicroBrew is considering the purchase of an automated bottling machine for $50,000. 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 $20,000. 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) Annual Depreciation Expense:

= ( Cost - Salvage value)÷ useful Life

= ( $ 50,000 - $0) ÷ 10 year

= $ 5000 Per Year.

2) Annual incremental net operating income provided by the new bottling machine?

Ans:

Operating cost of old machine	$13000
Less:Operating cost of New machine	($6000)
Less:Annual depreciation on the new machine	($5000)
Annual incremental net operating	$2000

3) Initial investment associated with this project :

Cost of the new machine	$50,000
Scrap value of old Scrap value of old machine	($20,000)
Initial Investment	$30,000

4) Simple rate of return:

Annual Incremental Net Operating Income	$2000
÷ Initial Investment	$30,000
Simple Rate Of Return	6.67%