Question

Barron Chemical uses a thermoplastic polymer to enhance the appearance of certain RV panels. The initial cost of one process was $126,000 with annual costs of $45,000. Revenues are $78,000 in year 1, increasing by $1000 per year. A salvage value of $20,000 was realized when the process was discontinued after 8 years. What rate of return did the company make on the process?

Answer 1

The company made a negative rate of return of -302.38% on the process, indicating a loss rather than a profit.

The Breakdown

To calculate the rate of return on the process, we need to consider the initial cost, annual costs, revenues, salvage value, and the number of years.

Given:

Initial cost: $126,000

Annual costs: $45,000

Revenues in year 1: $78,000

Revenue increase per year: $1,000

Salvage value: $20,000

Number of years: 8

First, let's calculate the total costs over the 8-year period:

Total costs = Initial cost + (Annual costs × Number of years)

Total costs = $126,000 + ($45,000 × 8) = $486,000

Calculating the total revenues over the 8-year period:

Total revenues = Revenues in year 1 + (Revenue increase per year × (Number of years - 1))

Total revenues = $78,000 + ($1,000 × 7) = $85,000

Calculating the net profit:

Net profit = Total revenues - Total costs + Salvage value

Net profit = $85,000 - $486,000 + $20,000 = -$381,000

The rate of return can be calculated using the formula:

Rate of return = (Net profit / Initial cost) × 100

Rate of return = (-$381,000 / $126,000) × 100 ≈ -302.38%

The company made a negative rate of return of -302.38% on the process, indicating a loss rather than a profit.

Answer 2

The company made a rate of return of 38.27%

Step-by-step explanation:

The rate of return is a measure of the net gain or loss that an investment incurs over a given period of time. The rate of return can be calculated using the formula below

Rate of return={(Total revenue-total cost)/(Total cost)}×100

Total revenue per year are as follows;

Year 1=78,000, Year 2=(78,000+1,000)=79,000, Year 3=(78,000+2000)=80,000, Year 4=(78,000+3,000)=81,000, Year 5=(78,000+4,000)=82,000, Year 6=(78,000+5,000)=83,000, Year 7=(78,000+6,000)=84,000, Year 8=(78,000+7,000)=85,000

Total revenues=(78,000+79,000+80,000+81,000+82,000+83,000+84,000+85,00)=

$652,000

Salvage value=$20,000

Total revenue after 8 years=(652,000+20,000)=$672,000

Total cost=Initial cost+annual costs

Initial cost=$126,000

Annual costs=45,000

Total costs=126,000+(45,000×8)

Total costs=126,000+360,000=$486,000

Net revenue=Total revenue-total costs

replacing;

Net revenue=(672,000-486,000)=$186,000

Rate of return=(Net revenue/total cost)×100

Rate of return=(186,000/486,000)×100

The company made a rate of return of 38.27%