Question

Addison Corporation is considering the purchase of equipment that would increase sales revenues by $250,000 per year and cash operating expenses by $100,000 per year. The equipment would cost $400,000 and have a 5-year life with no salvage value. The simple rate of return on the investment is closest to ________.

Answer 1

Answer:

17.5%

Explanation:

Calculation for The simple rate of return on the investment

First step is to calculate the Depreciation

Depreciation =$400,000/5 years

Depreciation = $ 80,000

Second step is to calculate the annual incremental net operating income

Sales Revenue $250,000

Less Cash Operating Expenses ($100,000)

Less Depreciation ($80,000)

Annual incremental net operating income $70,000

($250,000-$100,000-$80,000)

Last step is to calculate the simple rate of return on the investment using this formula

Simple rate of return=Annual incremental net operating income/Initial investment

Let plug in the formula

Simple rate of return=$70,000/$400,000

Simple rate of return=0.175*100

Simple rate of return=17.5%

The simple rate of return on the investment is closest to 17.5%