Question

An icon reads, "Service." Pierre’s hair salon is considering opening a new location in French Lick, California. The cost of building a new salon is $300,000. A new salon will normally generate annual revenues of $70,000, with annual expenses (including depreciation) of $41,500. At the end of 15 years, the salon will have a salvage value of $80,000.

Instructions:
Calculate the annual rate of return on the project.

Answer 1

The annual rate of return for Pierre's hair salon's new location is calculated to be 9.5%, by dividing the annual net income of $28,500 by the initial investment of $300,000.

Step-by-step explanation:

To calculate the annual rate of return on Pierre's hair salon's potential new location, we should consider the annual net income the project will generate and the initial investment. The annual net income is determined by subtracting the annual expenses from the annual revenues. According to the information provided, the salon is expected to generate annual revenues of $70,000 with annual expenses of $41,500. This leads to an annual net income of $28,500. The initial investment is $300,000. The annual rate of return can be calculated by dividing the annual net income by the initial investment.

To calculate the annual rate of return on the project, we need to consider the initial investment, annual revenues, annual expenses, and salvage value. The annual rate of return can be calculated using the formula: ROI = (Total Revenue - Total Expenses - Salvage Value) / Initial Investment. Substituting the given values, we get ROI = ($70,000 - $41,500 - $80,000) / $300,000. Solving this equation gives us an annual rate of return of approximately 8.5%, which is the measure of profitability for this project.