Finnegan Company plans to invest in a new operating plant that is expected to cost $500,000. The projected incremental income from the investment is as follows: $$\begin{array} { | l | c | }
\hline & \text { Net Income } \
\hline \text { Year } & \text { After Tax } \
\hline 1 & \$ 30,000 \
\hline 2 & \$ 45,000 \
\hline 3 & \$ 50,000 \
\hline 4 & \$ 55,000 \
\hline 5 & \$ 40,000 \
\hline 6 & \$ 20,000 \
\hline
\end{array}$$ The unadjusted rate of return on the initial investment would be approximately:

Question

Finnegan Company plans to invest in a new operating plant that is expected to cost $500,000. The projected incremental income from the investment is as follows: $$\begin{array} { | l | c | } 
\hline & \text { Net Income } \
\hline \text { Year } & \text { After Tax } \
\hline 1 & \$ 30,000 \
\hline 2 & \$ 45,000 \
\hline 3 & \$ 50,000 \
\hline 4 & \$ 55,000 \
\hline 5 & \$ 40,000 \
\hline 6 & \$ 20,000 \
\hline
\end{array}$$ The unadjusted rate of return on the initial investment would be approximately:

Quizplus · Accepted Answer

The unadjusted rate of return is calculated by dividing the average annual net income by the initial investment. The average annual net income is the sum of the net income for each year divided by the number of years. In this case, the average annual net income is ($30,000 + $45,000 + $50,000 + $55,000 + $40,000 + $20,000) / 6 = $40,000. The unadjusted rate of return is $40,000 / $500,000 = 8.0%.

Finnegan Company Plans to Invest in a New Operating Plant