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.)
--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 |
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