Average Rate of Return—Cost Savings
Midwest Fabricators Inc. is considering an investment inequipment that will replace direct labor. The equipment has a costof $85,000 with a $7,000 residual value and a ten-year life. Theequipment will replace one employee who has an average wage of$18,370 per year. In addition, the equipment will have operatingand energy costs of $4,130 per year.
Determine the average rate of return on the equipment, givingeffect to straight-line depreciation on the investment. Ifrequired, round to the nearest whole percent.
Calculate Cash Flows
Nature’s Way Inc. is planning to invest in new manufacturingequipment to make a new garden tool. The new garden tool isexpected to generate additional annual sales of 7,400 units at $46each. The new manufacturing equipment will cost $144,300 and isexpected to have a 10-year life and $11,100 residual value. Sellingexpenses related to the new product are expected to be 5% of salesrevenue. The cost to manufacture the product includes the followingon 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 2–9, and for the last year of the project. Use the minus signto indicate cash outflows. Do not round your intermediatecalculations but, if required, round your final answer to thenearest 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 | | | $ |
