Question

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%

Answer 1

c. 30%

Step-by-step 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%