Question

Studio Films is considering the purchase of some new film equipment that costs $150,000. It has a 5 year useful life with no salvage value. The new equipment is expected to increase revenues by $115,000 annually. Annual incremental cash operating expenses are expected to be $40,000.The simple rate of return of the equipment is _______%.

Answer 1

30%

Step-by-step explanation:

First find the present value of the Net Operating cashflows;

Net operating cashflow = Revenues - Expenses- Depreciation

Depreciation = Initial cost/useful life = 150,000/5 = 30,000

Therefore,

Net OCF = 115,000 - 40,000-30,000

Net Operating Cashflow = $45,000

Annual return = Net operating cashflow per year / Initial investment

Initial investment is given as = $150,000

Rate of return = 45,000 / 150,000

= 0.3

As a percentage, it becomes 0.3*100 = 30%