Airwave Communications Inc. is considering an investment in new equipment that will be used to manufacture a PDA (personal data assistant). The PDA is expected to generate additional annual sales of 4,800 units at $350 per unit. The equipment has a cost of $910,000, residual value of $50,000, and a 10 year life. The equipment can only be used to manufacture the PDA. The cost to manufacture the PDA is shown below.
|
Cost per unit: Direct labor |
$ 52.00 |
|
Direct materials |
195.00 |
|
Factory overhead (including depreciation) |
58.00 |
|
Total cost per unit |
$305.00 |
Determine the average rate of return on the equipment.