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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 is fully depreciated and 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?

Respuesta :

a. The annual depreciation expense associated with the new bottling machine is $12000.

b. The annual incremental net operating income provided by the new bottling machine is $6000.

c. The amount of the initial investment associated with this project that should be used for calculating the simple rate of return is $8000

d. The simple rate of return on the new bottling machine is 7.5%

How to calculate the depreciation?

A depreciation is a term which refers to the actual decrease of fair value of an asset, such as the decrease in value of factory equipment each year .

a. Annual depreciation expense:

= 120000/10

= $12000

b. 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

c. Cost of the new machine 120000

Less: Scrap value of old machine 40000

Initial investment 80000

d. Annual incremental net operating income 6000

Divide by Initial investment 80000

Simple rate of return 7.5%

Learn more about Depreciation at:

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