Question

The management of Ballard MicroBrew is considering the purchase of an automated bottling machine for $61,000. The machine would replace an old piece of equipment that costs $15,000 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

Answer 1

Answer:

1. $6,100

2. $3,000

3.$41,000

4.7.3%

Explanation:

1. Calculation for What is the annual depreciation expense associated with the new bottling machine

Depreciation expense= 61,000/10

Depreciation expense=$6,100

2. Calculation for What is the annual incremental net operating income provided by the new bottling machine

Reduction in Operating costs 9,000 ($15,000-$6,000)

Less: Depreciation expense $6000

Incremental net operating income $3,000

3. Calculation for What is the amount of the initial investment

Purchase cost $61,000

Less: Salvage value of old machine $20,000

Initial Investment $41,000

4. Calculation for What is the simple rate of return on the new bottling machine

Incremental net operating income 3000

÷ Initial Investment 41000

Simple rate of return 7.3%

(3,000÷41,000)