Chapter 12, Problem 3E

Average rate of return—new product

Hana Inc. is considering an investment in new equipment that will be used to manufacture a smart-phone. The phone is expected to generate additional annual sales of 10,000 units at $300 per unit. The equipment has a cost of $4,500,000, residual value of $500,000, and a 10-year life. The equipment can only be used to manufacture the phone. The cost to manufacture the phone follows:

Determine the average rate of return on the equipment.