Joetz Corporation has gathered the following data on a proposed investment project (Ignore income taxes.):
Investment required in equipment $ 30,000
Annual cash inflows $ 6,000
Salvage value of equipment $ 0
Life of the investment 15 years
Required 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:
Multiple Choice
A. 16%
B. 18%
C. 20%
D. 22%

Question

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Respuesta :

andromache andromache · Answer 1 · 2019-12-21T08:43:54+01:00

Answer:

13.3%

Explanation:

The formula to compute the simple accounting rate of return is shown below:

= Annual net income ÷ average investment

where,

Average investment is $30,000

And, the net income would be

= Annual net cash flows - depreciation expense

= $6,000 - $2,000

= $4,000

The depreciation expense

= (Original cost - residual value) ÷ (useful life)

= ($30,000 - $0) ÷ (15 years)

= ($30,000) ÷ (15 years)

= $2,000

Now put these values to the above formula

So, the rate would equal to

= $4,000 ÷ $30,000

= 13.3%

This is the answer and the same is not given in the options