1. Average Rate of ReturnCost Savings

Midwest Fabricators Inc. is considering an investment in equipment that will replace direct labor. The equipment has a cost of $108,000 with a $9,000 residual value and a five-year life. The equipment will replace one employee who has an average wage of $41,405 per year. In addition, the equipment will have operating and energy costs of $10,490 per year.

Determine the average rate of return on the equipment, giving effect to straight-line depreciation on the investment. If required, round to the nearest whole percent. %

2. Average Rate of ReturnNew Product

Galactic Inc. is considering an investment in new equipment that will be used to manufacture a smartphone. The phone is expected to generate additional annual sales of 6,700 units at $214 per unit. The equipment has a cost of $623,100, residual value of $46,900, and an eight-year life. The equipment can only be used to manufacture the phone. The cost to manufacture the phone follows:

Cost per unit:
	Direct labor		$35.00
	Direct materials		138.00
	Factory overhead (including depreciation)		23.50
		Total cost per unit	$196.50

Determine the average rate of return on the equipment. If required, round to the nearest whole percent. %