Question

J Corporation has gathered the following data on a proposed investment project (Ignore income taxes.): Investment required in equipment $ 30,500 Annual cash inflows $ 6,200 Salvage value of equipment $ 0 Life of the investment 15 years Required rate of return 10 % The company uses straight-line depreciation on all equipment. Assume cash flows occur uniformly throughout a year except for the initial investment. The simple rate of return for the investment (rounded to the nearest tenth of a percent) is:

Answer 1

Simple accounting rate of return= 27.32%

Step-by-step explanation:

The accounting rate of return = Average annual operating income / Average investment

Annual depreciation = ( Cost - Salvage value)/No of years = (30,500 - 0 )/15

= 2033.33

Average Investment -= (Cost + scrap Value)/ 2

= (30500 + 0)/2 =15,250

Average Annual income = 6,200 - 2033.33

= 4166.67

Simple accounting rate of return =( 4,166.667/ 15,250 )× 100

= 27.32%