Question

Studio Films is considering the purchase of some new film equipment that costs $150,000. It has a 5 year useful life with no salvage value. The new equipment is expected to increase revenues by $115,000 annually. Annual incremental cash operating expenses are expected to be $40,000. The simple rate of return of the equipment is

Answer 1

The simple rate of return to Studio Films on its film equipment based on its cost will be 30%.

What is the simple rate of return?

Find the annual income:

=Revenue - Expenses - Depreciation

= 115,000 - 40,000  (150,000 / 5 years)

= $45,000

The simple rate of return is:

= 45,000 / 150,000 cost

= 30%

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