Answer:
13%
Explanation:
The computation of the average rate of return on the investment is shown below:
= Annual net income ÷ average investment
The annual net income is shown below:
Increase in revenue $40,000
Less: Increase in expenses ($25,000)
Pretax income from investment $15,000
Less: Income tax expense $5,250 ($15,000 × 35%)
Net income from investment $9,750
The computation is shown below:
For increase in expense
= Annual cash operating expenses + Depreciation expense based on straight line method
= $10,000 + ($150,000 - $0 ÷ $10,000)
= $10,000 + $15,000
= $25,000
And, the average investment would be
= (Initial investment + salvage value) ÷ 2
= ($150,000 + $0) ÷ 2
= $150,000 ÷ 2
= $75,000
Now put these values to the above formula
So, the rate would equal to
= $9,750 ÷ $75,000
= 13%
