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Umnica [9.8K]
2 years ago
6

An equipment costing $60,000 is being evaluated for a production process at Don Jones Co. The expected benefits per year is $4,5

00 and estimated salvage value is $20,000. Determine the rate of return the company can get in this equipment proposal. Equipment life
Business
1 answer:
Vera_Pavlovna [14]2 years ago
5 0

Answer:

Rate of return= 11.25%

Explanation:

<em>The accounting rate of return is the average annual income expressed as a percentage of the average investment.  </em>

<em>The simple rate of return can be calculated using the two formula below:  </em>

<em>Accounting rate of return  </em>

= Annual operating income/Average investment × 100  

Average investment = (Initial cost + scrap value)/2  

Average annual income = Total income over investment period / Number of years

Average investment = (60,000 + 20,000)/2= $40,000

Average annual income is already given as  = 4,500

Rate of return = 4500/40,0000 × 100 = 50%

Rate of return= 11.25%

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Value of Operations Kendra Enterprises has never paid a dividend. Free cash flow is projected to be $80,000 and $100,000 for the next 2 years, respectively; after the second year, FCF is expected to grow at a constant rate of 10%. The company's weighted average cost of capital is 18%. What is the terminal, or horizon, value of operations

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