Question

Calculate the rate of return on a project that requires investment of $250,000 at the present time, which yields the net annual income of $50,000 from year 1 to year 10 and the salvage value of $80,000 at the end of year 10. (Assume you are planning to open a shipment company with the loan that you take and buy eight trucks, your company generates the net income of $50,000 per year for 10 years; and at the end, you can sell the used trucks for $80,000).

Answer 1

Solution (Assumption: Depreciation was not adjusted to Net annual income)

Annual Depreciation = (Initial Investment − Scrap Value) ÷ Useful Life in Years

Annual Depreciation = ($250,000 − $80,000) ÷ 10 ≈ $17,000

Average Accounting Income = $50,000 − $17,000 = $33,000

Rate of Return = Average Net annual Income / Average investment Rate of Return = $33,000 ÷ $250,000 ≈ 13.20% If Depreciation is already adjusted to Net annual income

Rate of Return = $50,000 ÷ $250,000 ≈ 20.00%