Question

(Ignore income taxes in this problem.) The budget method that maintains a constant twelve-month planning horizon by adding a new month on the end as the current month is completed is called: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:

Answer 1

Simple rate of return 19.92%

Step-by-step explanation:

Notice we are asked for the simple rate of return which is:

Δoperating income /investment

investment 738,000

We need to calculate the Δoperating income

change in operating income

Δsales 478,000

Δin cost 249,000

depreciation 82,000

Δoperaing income 147,000

Δoperating income /investment

147,000/738,000 = 0.19918699 = 19.92%