Answer:
The Average rate of return on investment is 5%
Explanation:
Solution
Given that:
Increase in revenue =$ 40,000.00
Increase in expenses $ 29,500.00
Pretax income from investment = $ 10,500.00
Income tax expense=$ 2,625.00
Net income from investment =$ 7,875.00
Now,
The Average rate of return on investment = ( Net income from investment / Initial Investment ) * 100
= ( $7875 / $ 1,75,000 ) * 100
= 4.5 %
= 5 % ( Rounded off to nearest whole number)
Thus, Average rate of return on investment is 5%
Working Note:
The Increase in expenses is calculated as follows:
The Increase in expenses = Annual cash operating expenses + Depreciation
= $ 12,000 + $ 17,500
= $ 29,500
Thus,
The Depreciation is computed by applying the Straight-line method as follows:
The Depreciation = ( Purchase cost - Salvage value ) / useful life
= ( $ 1,75,000 - 0) / 10
= $ 17,500 per year
Thus,
The Depreciation is non -cash expenditure hence it is considered while determining the profitability of company.
The Calculation of Income tax expense as follows:
The Income expense tax = Pretax income from investment * Income tax rate
= $ 10,500 * 25%
= $ 2,625
