Question

Berry Corp. is considering an investment with an initial cost of $250,000. Assume straight line depreciation with no salvage value is appropriate. The investment is expected to generate cash revenues of $200,000 and incur cash costs of $120,000 each year for the next four years. Assume straight line depreciation with no salvage value is appropriate. What is the investment's annual rate of return

Answer 1

Answer:

14%

Explanation:

Depreciation = Cost - Residual value / Useful life

Depreciation = ($250,000 - 0)/4

Depreciation = $62,500

Annual net earnings = Revenue - Cost - Depreciation

Annual net earnings = $200,000 - $120,000 - $62,500

Annual net earnings = $17,500

Annual rate of return = Annual net earnings / Average investment

Annual rate of return = $17,500/ [($250,000 + $0) /2]

Annual rate of return = $17,500 / $125,000

Annual rate of return = 0.14

Annual rate of return = 14%