Question

Average Rate of Return
Lakeland Company is considering the purchase of equipment for $140,000. The equipment will expand the Company's production and increase revenue by $35,000 per year. Annual cash operating expenses will increase by $10,000. The equipment's useful life is 10 years with no salvage value. Lakeland uses straight-line depreciation. The income tax rate is 35%. What is the average rate of return on the investment?

Do not use negative signs with your answers.

Increase in revenue	Answer
Increase in expenses	Answer
Pretax income from investment	Answer
Income tax expense	Answer
Net income from investment	Answer

Round answer to the nearest whole percentage, if applicable.

Average rate of return on investment

Answer

%

Answer 1

Increase in Revenue		$35,000
Less: Increase in expenses:
Depreciation Expense ($140,000 - $0/10 years)	$14,000
Cash operating expenses	$10,000
Total increase in expenses		$24,000
Pretax income from investment		$11,000
Less: Income tax expense ($11,000*35/100)		$3,850
Net income from investment		$7,150
Average Rate of Return:
Net income from investment (a)	$7,150
Average investment ($140,000 + $0/2)	$70,000
Average Rate of Return (a/b*100)	10%