Question

Suppose that new computer software for accounting and analysis at a business has a useful life of only one year and costs $200,000 before it needs to be upgraded to a new version. The revenue generated by this software is expected to be $250,000. The expected rate of return from this new computer software is________

Answer 1

The correct answer is 25%.

Step-by-step explanation:

The rate of return is the gain over an investment over a period of time, expressed as a proportion of the original investment. The period of time is usually one year, in which case the rate of return is referred to as the annual return.

To compare the yields in periods of time of different durations on an equal basis, it is useful to convert each yield into an "annualized yield". This conversion process, described later, is called "annualization."

To calculate, we use the following formula:

Rate of return = ((rev-cost) / software cost)

= ((250,000-200,000) /200,000)

= 0.25 * 100 = 25%