Question

Pierre’s Hair Salon is considering opening a new location in French Lick, California. The cost of building a new salon is $310,000. A new salon will normally generate annual revenues of $68,950, with annual expenses (including depreciation) of $40,000. 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.

Answer 1

15%

Step-by-step explanation:

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

= Annual net income ÷ average investment

where,

Annual net income would be

= Annual revenues - annual expenses

= $68,950 - $40,000

= $28,950

And, the average investment would be

= (Initial investment + salvage value) ÷ 2

= ($310,000 + $76,000) ÷ 2

= $386,000 ÷ 2

= $193,000

Now put these values to the above formula

So, the rate would equal to

= $28,950 ÷ $193,000

= 15%