Question

J Corporation has gathered the following data on a proposed investment project (Ignore income taxes.): Investment required in equipment $ 33,500 Annual cash inflows $ 7,400 Salvage value of equipment $ 0 Life of the investment 15 years Required rate of return 10 % The company uses straight-line depreciation on all equipment. Assume cash flows occur uniformly throughout a year except for the initial investment. The simple rate of return for the investment (rounded to the nearest tenth of a percent) is:

Answer 1

Answer:

15.4%

Explanation:

required initial investment $33,500

annual cash flows $7,400

useful life 15 years, no salvage value

depreciation expense per year = $33,500 / 15 = $2,233.33

simple rate of return = annual incremental net operating income / Initial investment

• annual incremental net operating income = $7,400 - $2,233.33 = $5,166.67
• initial investment = $33,500

simple rate of return = $5,166.67 / $33,500 = 15.4%