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A company is considering purchasing factory equipment that costs $400,000 and is estimated to have no salvage value at the end of its 5-year useful life.If the equipment is purchased, annual revenues are expected to be $150,000 and annual operating expenses exclusive of depreciation expense are expected to be $25,000.The straight-line method of depreciation would be used.
-If the equipment is purchased, the annual rate of return expected on this equipment is

Question

Use the following information for questions 
A company is considering purchasing factory equipment that costs $400,000 and is estimated to have no salvage value at the end of its 5-year useful life.If the equipment is purchased, annual revenues are expected to be $150,000 and annual operating expenses exclusive of depreciation expense are expected to be $25,000.The straight-line method of depreciation would be used.
-If the equipment is purchased, the annual rate of return expected on this equipment is

Quizplus · Accepted Answer

The annual depreciation expense is $80,000 ($400,000/5 years). The annual net income is $45,000 ($150,000 revenue - $25,000 expenses - $80,000 depreciation). The annual rate of return is 11.25% ($45,000 net income / $400,000 investment).

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