Average Rate of ReturnCost Savings

Sager Industries is considering an investment in equipment that will replace direct labor. The equipment has a cost of $127,000 with a $11,000 residual value and a 10-year life. The equipment will replace three employees who has an average total wages of $23,270 per year. In addition, the equipment will have operating and energy costs of $6,150 per year.

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