Answer:
Annual rate of return = 13%
Explanation:
Since the firm's net income increases by $30,000 per year, the cash flows per year = net income + depreciation costs
Depreciation costs = ($300,000 - $100,000) / 5 = $200,000 / 5 = $40,000
The cash flows generated by this investment are as follows:
Year 0 = -$300,000
Year 1 = $70,000
Year 2 = $70,000
Year 3 = $70,000
Year 4 = $70,000
Year 5 = $170,000 (including salvage value)
To calculate the project's rate of return (RoR) we can use an excel spreadsheet and the IRR function
=IRR (values,[guess])
=IRR (-300000,70000,70000,70000,70000,170000)
= 13%
