   Chapter 15, Problem 15.2E

Chapter
Section
Textbook Problem

Average rate of return—cost savingsSager Industries is considering an investment in equipment that will replace direct labor.The equipment has a cost of \$1.200,000 with a \$300,000 residual value and a 10-year life.The equipment will replace three employees who has an average total wages of \$180,000per year. In addition, the equipment will have operating and energy costs of \$7,500 peryear. Determine the average rate of return on the equipment, giving effect to straight-linedepreciation on the investment.

To determine

Concept Introduction:

ARR:

Accounting Rate of Return (ARR) is the rate of return earned on the investment made in a project. ARR is calculated by dividing the Average Accounting profits by Average Investment.

The formula to calculate ARR is as follows:

To Calculate:

The Average rate of return for the investment

Explanation

The Average rate of return for the investment is calculated as follows:

 Expected Total Savings (A) (180000+7500*10) \$ 255,000 Number of years (B) 8

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