Question

The management of Nixon Corporation is investigating purchasing equipment that would cost $524,000 and have a 7 year life with no salvage value. The equipment would allow an expansion of capacity that would increase sales revenues by $367,000 per year and cash operating expenses by $212,500 per year. (Ignore income taxes.) Required: Determine the simple rate of return on the investment. (Round your answer to 1 decimal place.)

Answer 1

Answer:

Calculation of simple rate of return is as follows:

Simple rate of return = ( Net annual Incremental operating income / Initial Investment cost ) * 100

= ( $ 79,642.9 / $ 5,24,000 ) * 100

= 15.2 %

Thus, Simple rate of return is 15.2%

Working Note:

Calculation of Net annual Incremental operating income is as follows:

Net annual Incremental operating income = Annual Incremental revenue - Annual Incremental Expenses

= $ 3,67,000 - $ 2,87,357.1

= $ 79,642.9

Annual Incremental revenue =  Increase sales revenues = $367,000

Annual Incremental Expenses = Increase in cash operating expense per year + Dpereciation per year

= $ 2,12,500 + $ 74,857.1

= $ 2,87,357.1

Dpereciation per year = ( Initial cost of equipment - Salvage value ) / Useful life

= ( $ 5,24,000 - $ 0 ) / 7

= $ 74,857.1 (Rounded off to 1 decimal place)