Question

(Ignore income taxes in this problem.) Duker Corporation is investigating the purchase of equipment that would increase sales revenues by $130,000 per year and cash operating expenses by $39,000 per year. The equipment would cost $328,000 and have an 8 year life with no salvage value. The company uses straight-line depreciation on all equipment. The simple rate of return on the investment is closest to:

Answer 1

Simple rate of return= 55.48%

Step-by-step explanation:

The simple accounting rate of return is the average annual income expressed as a percentage of the investment. The simple rate of return can be calculated using either of the two formula below:

Simple rate of return = Annual operating income/Average investment

Simple rate of return =

Net income = 130,000 - 39,000 = 91000

Average investment = (328,000 + 0)/2 = 164,000

Simple rate of return = 91,000/164,000× 100= 55.48%