Question

The management of Nixon Corporation is investigating purchasing equipment that would cost $554,000 and have a 7 year life with no salvage value. The equipment would allow an expansion of capacity that would increase sales revenues by $382,000 per year and cash operating expenses by $220,000 per year. (Ignore income taxes.)

Required:

Determine the simple rate of return on the investment. (Round your answer to 1 decimal place.)

Answer 1

--Correct Answer = 15.0% = Simple rate of return

A	Annual Net Cash Flows		$162,000
B	Investment	$554,000
C	Salvage Value	$0
D = B - C	Depreciable cost	$554,000
E	Life	7
F = D/E	Annual Depreciation		$79,143
G = A - F	Incremental net cash flows		$82,857
H = (G/B) x 100	Simple rate of return		14.96% or 15.0% Answer