Question

Pierre’s Hair Salon is considering opening a new location in French Lick, California. The cost of building a new salon is $270,000. A new salon will normally generate annual revenues of $65,850, with annual expenses (including depreciation) of $39,900. At the end of 15 years the salon will have a salvage value of $76,000.

Calculate the annual rate of return on the project. (Round answer to 0 decimal places, e.g. 125.)

Answer 1

15%

Step-by-step explanation:

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

= Annual net income ÷ average investment

where,

Annual net income equal to

= Annual revenues - annual expenses

= $65,850 - $39,900

= $25,950

And, the average investment would be

= (Initial investment + salvage value) ÷ 2

= ($270,000 + $76,000) ÷ 2

= $346,000 ÷ 2

= $173,000

Now put these values to the above formula

So, the rate would equal to

= $25,950 ÷ $173,000

= 15%