Question

Riverbed Oil Company is considering investing in a new oil well. It is expected that the oil well will increase annual revenues by $126,615 and will increase annual expenses by $71,000 including depreciation. The oil well will cost $443,000 and will have a $11,000 salvage value at the end of its 10-year useful life. Calculate the annual rate of return.

Answer 1

24.5% rounded to 25% if rounding is needed.

Step-by-step explanation:

We are looking for the annual rate of return for this answer. To calculate this, we first need to find out our annual net income and our average investment.

1.) Annual Net Income (Annual Revenues - Annual expenses)

= $126,615 - $71,000

= $55,615

2.) Average Investment

(Initial investment + Salvage Value) / 2

= ($443,000 + $11,000) / 2

= $454,000 / 2

= $227,000

3.) Annual Rate of Return (Annual Net Income / Average Investment)

= $55615 / $227000

= 0.245

= 24.5% rounded to 25% if your answer calls for rounding to a whole percentage.

Answer 2

12.55%

Step-by-step explanation:

Annual rate of return is also known as the accounting rate of return. It is calculated by dividing net income for the period associated and the initial investment. It does not account for the time value of money, it uses the simple cash flow.

As per given data

Revenue = $126,615 per year

Expense = $71,000

Rate of return = ( Revenue - Expenses ) / Initial Investment = ( 126,615 - 71,000 ) / $443,000 = 0.1255 = 12.55%