Question

An equipment costing $60,000 is being evaluated for a production process at Don Jones Co. The expected benefits per year is $4,500 and estimated salvage value is $20,000. Determine the rate of return the company can get in this equipment proposal. Equipment life

Answer 1

Answer:

Rate of return= 11.25%

Explanation:

The accounting rate of return is the average annual income expressed as a percentage of the average investment.  

The simple rate of return can be calculated using the two formula below:  

Accounting rate of return  

= Annual operating income/Average investment × 100  

Average investment = (Initial cost + scrap value)/2  

Average annual income = Total income over investment period / Number of years

Average investment = (60,000 + 20,000)/2= $40,000

Average annual income is already given as  = 4,500

Rate of return = 4500/40,0000 × 100 = 50%

Rate of return= 11.25%

Answer 2

The rate of return the company can get in this equipment proposal is 5.63%.

Given information

initial cost = 60000

Salvage = 20000

t = 20 yrs

Annual benefit = 4500

Let I be our rate of return, then Present worth at I% equals 0.

Present worth = -60000 + 4500*(P/A,i%,20) + 20000*(P/F,i%,20) = 0

4500*(P/A,i%,20) + 20000*(P/F,i%,20) = 60000

Divide both side by 500

9*(P/A,i%,20) + 40*(P/F,i%,20) = 120

Using the trail and error method

When I = 5%, 9*(P/A,i%,20) + 40*(P/F,i%,20) = 127.23547

when I = 6%, 9*(P/A,i%,20) + 40*(P/F,i%,20) = 115.70148

Using interpolation

I = 5% + (127.23547-120)/(127.23547-115.70148) *(6 - 5)

I = 5% + 0.6273%

I = 5.6273%

I = 5.63%

In conclusion, the rate of return the company can get in this equipment proposal is 5.63%.

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