Average Rate of Return Cost Savings
Master Fab Inc. is considering an investment in equipment that will replace direct labor. The equipment has a cost of $101,000 with a $9,000 residual value and a five-year life. The equipment will replace one employee who has an average wage of $35,850 per year. In addition, the equipment will have operating and energy costs of $9,750 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.