Question

[Problem 7-19] Stitching to powder coating technology will reduce the emission of volatile organic carbons (VOC) for a firm’s production process. The initial cost is $200,000 with annual cost of $50,000 and savings of $90,000 in the first year. Savings are projected to increase by $3,000 annually after year 1. The salvage value 10 years from now is projected to be $30,000. What rate of return will the firm make on this investment?

Answer 1

Answer:

Average rate of return formula= 28.25%

Explanation:

Giving the following information:

The initial cost is $200,000 with an annual cost of $50,000 and savings of $90,000 in the first year. Savings are projected to increase by $3,000 annually after year 1. The salvage value 10 years from now is projected to be $30,000.

Average rate of return formula= average annual profit/initial investment

Average annual profit= (40,000 + 43,000 + 46000 + 49000 + 52,000 + 55,000 + 58,000 + 61,000 + 64,000 + 97,000)/10= $56,500

Average rate of return formula= 56,500/200,000= 0.2825=28.25%