Average rate of return—cost savings OBJ. 2 Midwest Fabricators Inc. is considering an investment in equipment that will replace direct labor. The equipment has a cost of $132,000 with a $16,000 residual value and a 10-year life. The equipment will replace one employee who has an average wage of $34,000 per year. In addition, the equipment will have operating and energy costs of $5,380 per year.

Determine the average rate of return on the equipment, giving effect to straight-line depreciation on the investment.