Question

Blossom Oil Company is considering investing in a new oil well. It is expected that the oil well will increase annual revenues by $122,610 and will increase annual expenses by $72,000 including depreciation. The oil well will cost $471,000 and will have a $11,000 salvage value at the end of its 10-year useful life. Calculate the annual rate of return. (Round answer to 0 decimal places)

Answer 1

The annual rate of return for the oil well investment is 109.6%.

Step-by-step explanation:

To calculate the annual rate of return for the oil well investment, we need to calculate the net cash flow for each year. The net cash flow is calculated as the difference between the annual revenues and the annual expenses.

In this case, the net cash flow for each year can be calculated as: $122,610 - $72,000 = $50,610.

After 10 years, the salvage value of $11,000 is added to the net cash flow. So the total net cash flow after 10 years is: $50,610 * 10 + $11,000 = $516,100.

To calculate the annual rate of return, we divide the total net cash flow by the initial cost of the investment: $516,100 / $471,000 = 1.096.

Finally, we convert the rate of return to a percentage by multiplying it by 100: 1.096 * 100 = 109.6%.