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10 August, 22:38

Windsor Manufacturing is considering a project with an internal rate of return of 12%, an annual rate of return of 18%, and a 5-year useful life. The cost of the project is $150,000 and it has a $6,000 salvage value. Windsor uses straight-line depreciation. What is the annual net income of the project? A : $9,360 B : $8,640 C : $14,040 D : $12,960

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  1. 11 August, 01:57
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    Option (C) $14,040

    Explanation:

    Data provided in the question:

    Internal rate of return = 12%

    Annual rate of return = 18% = 0.18

    Cost of the project = $150,000

    Salvage value = $6,000

    Now,

    Annual return = (Expected net income) : (Average investment)

    or

    Expected net income = Annual return * Average investment

    = 0.18 * [ (Cost of the project + Salvage value) : 2 ]

    = 0.18 * [ ($150,000 + $6,00) : 2 ]

    = 0.18 * $78,000

    = $14,040

    Option (C) $14,040
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