Question

An expansion at fey, inc., would increase sales revenues by $150,000 per year and cash operating expenses by $47,000 per year. the initial investment would be for equipment that would cost $328,000 and have an 8 year life with no salvage value. the annual depreciation on the equipment would be $41,000. the simple rate of return on the investment is closest to:

Answer 1

Question:  The simple rate of return on the investment is closest to? A) 41.3% B) 18.9%

C) 12.5% D) 32.4%

Answer:  B) 18.9%

Solution:

Given:

Increase in expenses= 47,000

Increase in sales revenues= 150,000

Initial investment- 328,000

Let X = the simple rate of return

X=Annual incremental revenue/Initial Investment

X=(150,000-47,000)/328,000

X=103,000/328,000

X=18.9 %