Question

Jark Corporation has invested in a machine that cost $66,000, that has a useful life of twelve years, and that has no salvage value at the end of its useful life. The machine is being depreciated by the straight-line method, based on its useful life. It will have a payback period of five years. Given these data, the simple rate of return on the machine is closest to (Ignore income taxes.): (Round your answer to 1 decimal place.) Garrison 16e Rechecks 2017-11-11 Multiple Choice 8.1% 9.2% 28.3% 11.7%

Answer #1

Solution: | ||||

Answer is 4th option 11.7% | ||||

Working Notes: | ||||

Simple rate of return = Annual operating income /Initial Investment | ||||

Initial investment | $66,000 | |||

Annual cash inflow = Initial investment/payback period | ||||

=$66,000/5 | ||||

=$13,200 | ||||

Annual depreciation = (cost -salvage value)/life | ||||

=(66,000-0)/12 | ||||

=$5,500 | ||||

Annual operating income = Annual cash inflow - Annual depreciation | ||||

=$13,200 - $5,500 | ||||

=$7,700 | ||||

Simple rate of return = Annual operating income /Initial Investment | ||||

=$7,700/$66,000 | ||||

=0.116666 | ||||

=11.66666% | ||||

=11.7% | ||||

Please feel free to ask if anything about above solution in comment section of the question. |

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