Question

(Ignore income taxes in this problem.) An expansion at Fidell, Inc., would increase sales revenues by $75,000 per year and cash operating expenses by $38,000 per year. The initial investment would be for equipment that would cost $135,000 and have a 5 year life with no salvage value. The annual depreciation on the equipment would be $27,000. The simple rate of return (AARR) on the investment is closest to:

Answer 1

Answer:

The simple rate of return on the investment is closest to 7.41%.

Explanation:

This can be calculated as follows:

Equipment cost = $135,000

Annual profit = Annual sales revenue - Annual operating expenses - Annual depreciation on the equipment = $75,000 - $38,000 - $27,000 = $10,000

Therefore, we have:

Simple rate of return on the investment = Annual profit / Equipment cost = $10,000 / $135,000 = 0.0741, or 7.41%

Therefore, the simple rate of return on the investment is closest to 7.41%.