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 $131,000 with a $11,000 residual value and a five-year life. The equipment will replace one employee who has an average wage of $41,690 per year. In addition, the equipment will have operating and energy costs of $12,720 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.

Net Present Value-Unequal Lives are as follows: The estimated residual value of the processing mill at the end of Year 4 is $230,000. Present Value of $1 at Compound Interest