The management of Ballard MicroBrew is considering the purchase of an automated bottling machine for $120,000. The

Question:

The management of Ballard MicroBrew is considering the purchase of an automated bottling machine for $120,000. The machine would replace an old piece of equipment that costs $30,000 per year to operate. The new machine would cost $12,000 per year to operate. The old machine currently in use could be sold now for a salvage value of $40,000. The new machine would have a useful life of 10 years with no salvage value.

Required:

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

2. What is the annual incremental net operating income provided by the new bottling machine?

3. What is the amount of the initial investment associated with this project that should be used for calculating the simple rate of return?

4. What is the simple rate of return on the new bottling machine?

Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...