Question

Swift Oil Company is considering investing in a new oil well. It is expected that the oil well will increase annual revenues by $140,000 and will increase annual expenses by $88,000 including depreciation. The oil well will cost $465,000 and will have a $10,000 salvage value at the end of its 10-year useful life. Calculate the annual rate of return. (Round answer to 2 decimal places, e.g. 12.47.)

Answer 1

Answer: Annual rate of return = 21.89%

Step-by-step explanation:

Given that,

Expected increase in annual revenues by = $140000

Expected increase in annual expenses by = $88,000 including depreciation

Cost of oil well = $465,000

salvage value at the end of its 10-year useful life = $10,000

Expected Income = Expected increase in annual revenues - Expected increase in annual expenses

= 140000 - 88000

=$52000

Average investment =
`(465000+10000)/(2)`

= $237500

Annual rate of return =
`(Expected\ Annual\ Income)/(Average\ Investment)`

=
`(52000)/(237500)`

= 21.89%