Final answer:
The annual rate of return on the company's investment in new equipment is calculated by dividing the total return (increase in net income over 5 years plus salvage value) by the investment cost, resulting in an annual rate of return of 16.67%.
Step-by-step explanation:
To calculate the annual rate of return on the company's investment of $300,000 in new equipment, we need to consider the total increase in net income over the life of the equipment and the expected salvage value at the end of its life. The projected increase in net income is $30,000 each year for five years, which totals $150,000.
The equipment has a salvage value of $100,000 after five years. To find the return, we also add the salvage value to the net income, resulting in a total return of $150,000 + $100,000 = $250,000 over the five-year period.
The investment's cost is $300,000, so to find the annual rate of return, we divide the total return by the investment cost and then divide by the number of years:
Total return = Net income increase over 5 years + Salvage value
Total return = ($30,000 × 5) + $100,000
Total return = $250,000
Annual rate of return = (Total return / Investment Cost) / Life of the investment
Annual rate of return = ($250,000 / $300,000) / 5
Annual rate of return = 0.1667 or 16.67%