Question

A company projects an increase in net income of $108000 each year for the next five years if it invests $900000 in new equipment. The equipment has a 5-year life and an estimated salvage value of $300000. What is the annual rate of return on this investment?

a. 20.5%
b. 31.0%
c. 30.0%
d. 30.8%

Answer 1

18 %

Step-by-step explanation:

Annual rate of return on this investment = annual profit / average investment x 100

where,

annual profit = $108000

average investment = (initial cost + salvage value) ÷ 2

= ($900000 + $300000) ÷ 2

= $600,000

therefore,

annual rate of return on this investment = $108000 / $600,000 x 100

= 18 %