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3 June, 13:57

Joetz Corporation has gathered the following data on a proposed investment project (Ignore income taxes.):

Investment required in equipment $ 30,000

Annual cash inflows $ 6,000

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:

Multiple Choice

A. 16%

B. 18%

C. 20%

D. 22%

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Answers (1)
  1. 3 June, 16:07
    0
    13.3%

    Explanation:

    The formula to compute the simple accounting rate of return is shown below:

    = Annual net income : average investment

    where,

    Average investment is $30,000

    And, the net income would be

    = Annual net cash flows - depreciation expense

    = $6,000 - $2,000

    = $4,000

    The depreciation expense

    = (Original cost - residual value) : (useful life)

    = ($30,000 - $0) : (15 years)

    = ($30,000) : (15 years)

    = $2,000

    Now put these values to the above formula

    So, the rate would equal to

    = $4,000 : $30,000

    = 13.3%

    This is the answer and the same is not given in the options
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