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 $85,000 with a $7,000 residual value and a ten-year life. The equipment will replace one employee who has an average wage of $18,370 per year. In addition, the equipment will have operating and energy costs of $4,130 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.

Calculate Cash Flows

Natures Way Inc. is planning to invest in new manufacturing equipment to make a new garden tool. The new garden tool is expected to generate additional annual sales of 7,400 units at $46 each. The new manufacturing equipment will cost $144,300 and is expected to have a 10-year life and $11,100 residual value. Selling expenses related to the new product are expected to be 5% of sales revenue. The cost to manufacture the product includes the following on a per-unit basis:

Direct labor		$7.80
Direct materials		25.60
Fixed factory overhead-depreciation		1.80
Variable factory overhead		3.90
	Total	$39.10

Determine the net cash flows for the first year of the project, Years 29, and for the last year of the project. Use the minus sign to indicate cash outflows. Do not round your intermediate calculations but, if required, round your final answer to the nearest dollar.

Out of Eden, Inc.
Net Cash Flows
	Year 1	Years 2-9	Last Year
Initial investment	$
Operating cash flows:
Annual revenues	$	$	$
Selling expenses
Cost to manufacture
Net operating cash flows	$	$	$
Total for Year 1	$
Total for Years 2-9		$
Residual value
Total for last year			$