Olsen Inc.purchased a $600,000 machine to manufacture a specialty tap for electrical equipment.The tap is in high demand and Olsen can sell all that it could manufacture for the next ten years.The government exempts taxes on profits from new investments in order to encourage capital investments.This legislation most likely will remain in effect in the foreseeable future.The equipment is expected to have ten years of useful life with no salvage value.The firm uses straight-line depreciation.The net cash inflow is expected to be $144,000 each year.Olsen uses a discount rate of 10% in evaluating its capital investments.The book (accounting)rate of return based on initial investment is:

Question

Quizplus · Accepted Answer

The book (accounting) rate of return based on initial investment is calculated as the average annual net income divided by the initial investment.

The average annual net income is the total net cash inflow over the life of the investment divided by the number of years.

Total net cash inflow = $144,000 x 10 years = $1,440,000

Average annual net income = $1,440,000 / 10 years = $144,000

The initial investment is $600,000.

The book (accounting) rate of return based on initial investment is therefore:

Book rate of return = Average annual net income / Initial investment x 100%

Book rate of return = $144,000 / $600,000 x 100%

Book rate of return = 0.24 x 100%

Book rate of return = 24%

Therefore, the best choice is B.

Olsen Incpurchased a $600,000 Machine to Manufacture a Specialty Tap for for Electrical