(Ignore income taxes in this problem. )Overland Corporation has gathered the following data on a proposed investment project: The company uses straight-line depreciation on all equipment.Assume cash flows occur uniformly throughout a year except for the initial investment. The simple rate of return on the investment is:

Question

(Ignore income taxes in this problem. )Overland Corporation has gathered the following data on a proposed investment project:  The company uses straight-line depreciation on all equipment.Assume cash flows occur uniformly throughout a year except for the initial investment. The simple rate of return on the investment is:

Quizplus · Accepted Answer

To calculate the simple rate of return, we need to find the average annual cash inflow for the project and divide it by the initial investment.

Average Annual Cash Inflow= (Total Cash Inflows - Initial Investment) / Useful Life
Average Annual Cash Inflow = ($120,000 - $40,000) / 5 years
Average Annual Cash Inflow = $16,000

Simple Rate of Return = Average Annual Cash Inflow / Initial Investment x 100%
Simple Rate of Return = $16,000 / $96,000 x 100% 
Simple Rate of Return = 16.67%

Therefore, the best choice is B, with a simple rate of return of 16.67%.

(Ignore Income Taxes in This Problem