Question

A company is considering purchasing factory equipment that costs $480000 and is estimated to have no salvage value at the end of its 8-year useful life. If the equipment is purchased, annual revenues are expected to be $197400 and annual operating expenses exclusive of depreciation expense are expected to be $39000. The straight-line method of depreciation would be used.

If the equipment is purchased, the annual rate of return expected on this equipment is ___________.

Answer 1

The annual rate of return expected on the equipment can be determined using the formula for return on investment (ROI).

Step-by-step explanation:

The annual rate of return expected on the equipment can be determined using the formula for return on investment (ROI). The formula for ROI is (Net Income + Depreciation) / Initial Investment x 100%. In this case, the net income can be calculated as annual revenues minus annual operating expenses (exclusive of depreciation expense).

The initial investment is the cost of the equipment. To calculate the depreciation expense, divide the cost of the equipment by the useful life in years. The net income and depreciation expense can then be substituted into the ROI formula to find the annual rate of return expected on the equipment.