Question

**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.**-
- 1%
- 7%
- 10%
- 17%
- 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.

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