Question

Wildhorse Company is considering two capital investment proposals. Estimates regarding each project are provided below:

Project Soup Project Nuts
Initial investment $400000 $600000
Annual net income 44000 60000
Net annual cash inflow 120000 149000
Estimated useful life 5 years 6 years
Salvage value 0 0
The company requires a 10% rate of return on all new investments.
Present Value of an Annuity of 1
Periods 9% 10% 11% 12%
5 3.890 3.791 3.696 3.605
6 4.486 4.355 4.231 4.111
The annual rate of return for Project Soup is:_____.
a. 60.0%.
b. 22.0%.
c. 30.0%.
d. 11.0%.

Answer 1

b. 22.0%.

Step-by-step explanation:

The computation of the annual rate of return is shown below:

Annual Rate of Return = (Average Net Income ÷ Average Investment × 100)

where,

Average net income $44,000

And, the average investment is

= $400,000 ÷ 2

= $200,000

So, the annual rate of return is

= ($44,000 ÷ $200,000) × 100

= 22%

We simply applied the above formula to determine the annual rate of return