Question

Pierre's Hair Salon is considering opening a new location in French Lick, California. The cost of building a new salon is $284,000. A new salon will normally generate annual revenues of $60,490, with annual expenses (including depreciation) of $40,800. At the end of 15 years the salon will have a salvage value of $74,000 Calculate the annual rate of return on the project.

Answer 1

Answer:

11%

Explanation:

The computation of the annual rate of return is shown below:

Annual rate of return = Average annual income ÷average investment

where,

Average investment = (Initial investment + Salvage value) ÷ 2

= ($284,000 + $74,000) ÷ 2

= $179,000

And,

Average annual income is

= $60,490 - $40,800

= $19,690

So, the annual rate of return is

= $19,690 ÷ $179,000

= 11%

We simply applied the above formula