Question

Chemco Enterprises is the manufacturer of Ultra-Dry, a hydrophobic coating that will waterproof anything. Over a 5-year period, the costs associated with the pilot test product line were as follows: first cost of $43,000 and annual costs of $18,000. Annual revenue was $27,000 and used equipment was salvaged for $4,000. What rate of return did the company make on this product?

Answer 1

Let's calculate the simple rate of return of this product:

working notes:

1) computing depreciation *

(Original Cost of the product - Salvage value) / Number of years of life of the product

43000-4000/5 = $7800

2) computing the rate of return:

Incremental operating income per year = $27000 – ($ 18000 exp. + $7800 dep.*)

= $1200

Accounting/simple rate of return = Incremental accounting income/Initial investment

= $1200/$43000 = 2.79%

alternate method (ignoring depreciation)

: Operating income = 27000- 18000 = $9000

rate of return = 9000/43000= 20.93%

answered by: anonymous