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Joetz Corporation has gathered the following data on a proposed investment project (Ignore income taxes
Joetz Corporation has gathered the following data on a proposed investment project (Ignore income taxes.):
Investment required in equipment$40,000 Annual cash inflows $10,000 Salvage value of equipment$0 Life of the investment 15yearsRequired 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:
Expert Solution
Answer
The simple rate of return for the investment = 36.67%
Step-by-step explanation
Annual Net Income = Annual cash inflows - Annual Depreciation
Annual Net Income = 10000 - (40000/15)
Annual Net Income = 7333.33
Average Investment= (Initial Investment + Salvage value)/2
Average Investment= (40000+0)/2
Average Investment= 20000
The simple rate of return for the investment = Annual Net Income/Average Investment
The simple rate of return for the investment = 7333.33/20000
The simple rate of return for the investment = 36.67%
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