Question

Hartong Corporation is contemplating purchasing equipment that would increase sales revenues by $185,000 per year and cash operating expenses by $89,000 per year. The equipment would cost $416,000 and have a 8 year life with no salvage value. The annual depreciation would be $52,000. The simple rate of return on the investment is closest to:A. 23.8%B. 12.5%C. 10.6%D. 23.1%

Answer 1

Answer:

The simple rate of return on the investment is closest to: C. 10.6%

Explanation:

In Hartong Corporation:

Increasing net income = Increase sales revenues - Cash operating expenses - Annual depreciation expense = $185,000 - $89,000 - $52,000 = $44,000

This is the net income from the equipment per year

Return on the investment (ROI) is calculated by using following formula:

ROI = (Net income/Cost of investment )x 100%

Cost of investment  = Cost of equipment = $416,000

ROI = ($44,000/$416,000) x 100% = 10.6%