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19 August, 07:44

The management of P Corporation is considering purchasing equipment that would increase sales revenues by $269,000 per year, and increase cash operating expenses by $156,000 per year. The equipment would cost $294,000, and have a 6-year life with no salvage value. The annual depreciation would be $49,000. The simple rate of return on the investment is closest to: A) 16.7% B) 21.8% C) 23.8% D) 38.4%

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  1. 19 August, 09:57
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    C) 23.8 %

    Explanation:

    Ther total profitability from the purchase of the equipment is as follows:

    Incremental sales revenues: $ 269,000

    Incremental operating expenses: $ 156,000

    $ 113,000

    Depreciation on the equipment $ 49,000

    Net profitability on new equipment $ 64,000

    Return on equipment purchased (64,000/269,000) = 23.79 %
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