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Item $16$

Exercise $14-6($Algo$)$ Simple Rate of Return Method $[$LO$14-6]$

The management of Ballard MicroBrew is considering the purchase of an automated bottling machine for $$71,000.$ The machine would replace an old piece of equipment that costs $$18,000$ per year to operate. The new machine would cost $$8,000$ per year to operate. The old machine currently in use is fully depreciated and could be sold now for a salvage value of $$26,000.$ The new machine would have a useful life of $10$ years with no salvage value.

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Required:

$1.$ What is the annual depreciation expense associated with the new bottling machine?

$2.$ What is the annual net operating income provided by the new bottling machine? $($Remember that net operating income is equal to revenue less expenses. The revenue is the operation savings and the expense is the depreciation.$)$

$3.$ What is the amount of the initial investment associated with this project that should be used for calculating the simple rate of return? $($Remember to take the initial investment less the salvage of the OLD equipment.$)$

$4.$ What is the simple rate of return on the new bottling machine? $($Round your answer to $1$ decimal place i$.$e$.0\mathrm{.}123$ should be considered as $12\mathrm{.}3\%.)$

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YearInvestmentCash Inflow$1$$$78,000$$$5,0002$$$5,000$$$10,0003$$$12,0004$$$15,0005$$$18,0006$$$16,0007$$$14,0008$$$12,0009$$$11,00010$$$11,000$

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Required:

$1.$ Determine the payback period of the investment.

$2.$ Would the payback period be affected if the cash inflow increased significantly in year $10?$