Final answer:
To estimate the rate of return, add the total revenue over 10 years and the salvage value, then subtract the initial investment to find net return. Divide the net return by 10 to get the average annual return, then divide by the initial investment to get the rate of return, which is approximately 24.63%.
Step-by-step explanation:
Estimating the Rate of Return on Investment
To estimate the rate of return on an investment made by a manufacturer in equipment for producing compact piezoelectric accelerometers, we need to consider the initial investment, the annual revenue generated, and the salvage value at the end of the equipment's useful life. In this case, the initial investment is $670,000, the revenue is $225,000 per year for 10 years, and the salvage value is $70,000 at the end of year 10.
The simple way to roughly estimate the rate of return is using the average return over the investment period. To calculate this, you can add all the revenues and the salvage value and then subtract the initial investment:
Total Revenue over 10 years = 10 * $225,000 = $2,250,000
Total Salvage Value in year 10 = $70,000
Total Returns = Total Revenue + Total Salvage Value = $2,250,000 + $70,000 = $2,320,000
Net Return over 10 years = Total Returns - Initial Investment = $2,320,000 - $670,000 = $1,650,000
The average annual return = Net Return / 10 years = $1,650,000 / 10 = $165,000
The rate of return = (Average Annual Return / Initial Investment) * 100 = ($165,000 / $670,000) * 100 ≈ 24.63%
This is a simple estimation and does not take into account the time value of money.