Question

A project that cost $80000 with a useful life of 5 years is being considered. Straight-line depreciation is being used and salvage value is $5000. The project will generate annual revenues of $22650. The annual rate of return is:

Answer 1

Answer:

8.13%

Explanation:

Annual return = [ (Total FV/Initial investment)^(1/n) ] -1

n = useful life of the project

Total Future Value = (22650*5) +5000

Total FV = $118,250

Initial investment = $80,000

Annual return = [ (118,250/80,000)^(1/5) ] -1

r = [ (1.478125^(1/5)] -1

r = 1.0813 - 1

r = 0.0813 or 8.13%