Question

A company is considering purchasing a machine that costs $280,000 and is estimated to have no salvage value at the end of its 8-year useful life. If the machine is purchased, annual revenues are expected to be $100,000 and annual operating expenses exclusive of depreciation expense are expected to be $38,000. The straight-line method of depreciation would be used. If the machine is purchased, the annual rate of return expected on this machine is:__________.

Answer 1

Answer:

19.29%

Explanation:

We can calculate Annual Rate of Return by using the following formula:

ARR = Net Income /  Average Investment

Here

Net Income $27,000 Step1

Average Investment $140,000 Step2

By putting values, we have:

ARR = $27,000 / $140,000  = 19.29%

Step1: Net Income

Net Income = Annual Revenue - Depreciation - Operating Expenses

Here

Annual Revenue = $100,000 - $280,000/8  - $38,000

= $100,000 - $35,000 - $38,000

= $27,000

Step2: Average Investment

Average Investment = (Initial Investment + Scrap Value)/ 2

Average Investment = ($280,000 + 0)/2 = $140,000