Question

Windsor Manufacturing is considering a project with an internal rate of return of 12%, an annual rate of return of 18%, and a 5-year useful life. The cost of the project is $150,000 and it has a $6,000 salvage value. Windsor uses straight-line depreciation. What is the annual net income of the project? A : $9,360 B : $8,640 C : $14,040 D : $12,960

Answer 1

Answer:

Option (C) $14,040

Explanation:

Data provided in the question:

Internal rate of return = 12%

Annual rate of return = 18% = 0.18

Cost of the project = $150,000

Salvage value = $6,000

Now,

Annual return = ( Expected net income ) ÷ ( Average investment )

or

Expected net income = Annual return × Average investment

= 0.18 × [ ( Cost of the project + Salvage value ) ÷ 2 ]

= 0.18 × [ ( $150,000 + $6,00 ) ÷ 2 ]

= 0.18 × $78,000

= $14,040

Option (C) $14,040