Question

Swift Oil Company is considering investing in a new oil well. It is expected that the oil well will increase annual revenues by $140,000 and will increase annual expenses by $88,000 including depreciation. The oil well will cost $465,000 and will have a $10,000 salvage value at the end of its 10-year useful life. Calculate the annual rate of return. (Round answer to 2 decimal places, e.g. 12.47.)

Answer 1

Answer: Annual rate of return = 21.89%

Explanation:

Given that,

Expected increase in annual revenues by = $140000

Expected increase in annual expenses by =  $88,000 including depreciation

Cost of oil well = $465,000

salvage value at the end of its 10-year useful life = $10,000

Expected Income = Expected increase in annual revenues - Expected increase in annual expenses

= 140000 - 88000

=$52000

Average investment = $\frac{465000+10000}{2}$

= $237500

Annual rate of return = $\frac{Expected\ Annual\ Income}{Average\ Investment}$

= $\frac{52000}{237500}$

= 21.89%