Slomkowski Corporation is contemplating purchasing equipment that would increase sales revenues by $298,000 per year and cash operating expenses by $143,000 per year. The equipment would cost $712,000 and have an 8 year life with no salvage value. The annual depreciation would be $89,000. The simple rate of return on the investment is closest to (Ignore income taxes.):

Question

Quizplus · Accepted Answer

The simple rate of return is calculated as (Incremental Net Operating Income / Initial Investment). Incremental Net Operating Income = Incremental Revenue - Incremental Expenses - Depreciation = $298,000 - $143,000 - $89,000 = $66,000. Simple Rate of Return = $66,000 / $712,000 = 9.27%, which is closest to 9.3%.

Slomkowski Corporation Is Contemplating Purchasing Equipment That Would Increase Sales