Answer:
Midwest Fabric should go for equipment purchase.
Explanation:
The employee wage is $34,000 per year.
Let compare with the machine life span which is for 10 years.
Assume the employee will be paid $34,000 X 10 years as against use of machine, total expenses to be bared is =$340,000
The machine cost $132,000 which will have a residual value as at 10 years which is $16,000. Then we have to deduct that from the Original cost, to reflect the cost incurred. = $132,000 - $16,000 =$116,000.
The machine will require additional $5,380 per year for 10 years operation: $5,380 X 10years =$53,800.
Therefore, total expenses for the equipment is $116,000 + $53,800 = $164,000
My advice will be for the company to buy the machine as it will be less expensive to incur than the wages to be paid for the employee and it will also be more efficient in mode of operation than manual worker.
Answer:
23%
Explanation:
Cost of equipment = $132,000
Residual value = $16,000
Useful life = 10 years
Annual depreciation = (Cost of equipment - Residual value)/Useful life
= (132,000 - 16,000)/10
= $11,600
Annual saving in labor cost = $34,000
Increase in operating cost = $5,380
Annual saving in labor cost 34,000
Increase in operating cost -5,380
Annual depreciation -11,600
Net income $17,020
Average investment = (Cost of equipment + Salvage value)/2
= (132,000 + 16,000)/2
= $74,000
Average rate of return = Net income/Average investment
= 17,020/74,000
= 0.23% or 23%
Therefore the average rate of return on the equipment, giving effect to straight-line depreciation on the investment is 23%
