question archive Wombles Corporation is contemplating purchasing equipment that would increase sales revenues by $478,000 per year and cash operating expenses by $249,000 per year
Wombles Corporation is contemplating purchasing equipment that would increase sales revenues by $478,000 per year and cash operating expenses by $249,000 per year
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Wombles Corporation is contemplating purchasing equipment that would increase sales revenues by $478,000 per year and cash operating expenses by $249,000 per year. The equipment would cost $738,000 and have a 9 year life with no salvage value. The annual depreciation would be $82,000. The simple rate of return on the investment is closest to:
A) 19.9%
B) 30.8%
C) 31.0%
D) 11.1%
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Answer: - Option "A" -------- 19.9%
Explanation: - Given data
Total investment cost = $738,000
Cash operating expenses = $249,000 per year
Increase in sales revenues = $478,000 per year
Life span of equipment = 9 years
Annual depreciation = Total investment cost / Life span of equipment
= $738,000 / 9 = $82,000
Simple rate of return on the investment is calculated using the formula
= (Increase in sales revenues - Cash operating expenses - Annual depreciation) / Total investment cost
= ($478,000 - $249,000 - $82,000) / $738,000
= $147,000 / $738,000 = 19.9%
Simple rate of return on the investment is closest to = 19.9%
