Question

1. What is the simple rate of return of a micro-sprinkler irrigation system that costs $120,000 and has returns of $50,000 in year one, $40,000 in year two, $30,000 in year three, and $20,000 in year four? All cash outflows occur at the end of the year.
2. 1. 1%
   2. 7%
   3. 10%
   4. 17%
   5. 70%

Answer 1

Ans.

Simple rate of Return = Net Income / Initial Investment

Net Income = Total Cash Flows - Depreciation

Total Cash Flows = $ 50,000 + $ 40,000 + $ 30,000 + $ 20,000 = $ 140,000

As no salvage value is given Total Depreciation in four years = $ 120,000 ($ 30,000 per Year)

Net Income = $ 140,000 - $ 120,000 = $ 20,000

Initial Investment = $ 120,000

Simple rate of Return = $ 20,000 / $ 120,000 = 0.1666 or 16.67%

Simple rate of Return = 17% (rounded off)

So the correct option is D.