Question

Sheffield Company had an investment which cost $250000 and had a salvage value at the end of its useful life of zero. If Mussina's expected annual net income is $5000, the annual rate of return is:

Answer 1

Answer: 4%

Explanation:

From the question, we are informed that Sheffield Company had an investment which cost $250000 and had a salvage value at the end of its useful life of zero and that Mussina's expected annual net income is $5000.

It should be noted that the annual rate of return is calculated as the average Income divided by the average investment. Here, the average Income is $5,000 while the average investment will be ($250,000/2) = $125,000.

Therefore, annual rate of return will be:

= $5000/$125,000

= 4%