A company projects an increase in net income of $180,000 each year for the next five years if it invests $900,000 in new equipment. The equipment has a five-year life and an estimated salvage value of $300,000. What is the annual rate of return on this investment? a. 20%b. 60%c. 30%d. 40%

Question

Business

Liana Thompson

25 June, 19:56

A company projects an increase in net income of $180,000 each year for the next five years if it invests $900,000 in new equipment. The equipment has a five-year life and an estimated salvage value of $300,000. What is the annual rate of return on this investment? a. 20%b. 60%c. 30%d. 40%

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Maribel · Answer 1

c. 30%

Explanation:

The formula and the calculation of the annual rate of return is shown below:

= Annual net income : average investment

where,

Annual net income is $180,000

And, the average investment would be

= (Initial investment + salvage value) : 2

= ($900,000 + $300,000) : 2

= $1,200,000 : 2

= $600,000

Now placing these values in the formula above

So, the rate would equal to

= $180,000 : $600,000

= 30%