Question

Pierre’s Hair Salon is considering opening a new location in French Lick, California. The cost of building a new salon is $280,000. A new salon will normally generate annual revenues of $67,320, with annual expenses (including depreciation) of $38,600. At the end of 15 years the salon will have a salvage value of $79,000.Calculate the annual rate of return on the project.

Answer 1

16%

Step-by-step explanation:

Given: Cost of building new salon is $280000.

Annual revenue is $67320.

Annual expenses is $38600.

salvage value is $79000.

First, lets calculate Annual income.

Annual income=
`Revenue-expense`

Annual income=
`67320-38600= \$ 28720`

Now, calculating the average investment.

Average investment=
`((Investment + salvage value)/(2)`

Average investment=
`((280000+79000))/(2) = (359000)/(2)`

∴ Average investment=
`\$ 179500`

Annual rate of return=
`(Annual\ income)/(Average\ investment) * 100`

Annual rate of return=
`(28720)/(179500) * 100 = 16\%`

∴Annual rate of return on the project is 16%.