1. Average Rate of ReturnCost Savings

   Maui Fabricators Inc. is considering an investment in equipment that will replace direct labor. The equipment has a cost of $125,000 with a $15,000 residual value and an eight-year life. The equipment will replace one employee who has an average wage of $28,000 per year. In addition, the equipment will have operating and energy costs of $5,150 per year.

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

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   Divide the estimated average annual income by the average investment. Average savings less depreciation expense less additional operating costs equals average annual income.