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 $95,000 with a $8,000 residual value and a five-year life. The equipment will replace one employee who has an average wage of $33,830 per year. In addition, the equipment will have operating and energy costs of $9,220 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. %