The Halsey Corporation is contemplating the purchase of new equipment that would require an initial investment of $125,000.The equipment would have a useful life of six years,with a salvage value of $29,000.This new equipment would be depreciated over its useful life by the straight-line method.It would replace existing equipment which is fully depreciated.The existing equipment has a salvage value now of $38,000.The anticipated annual revenues and expenses associated with the new equipment are: Assume cash flows occur uniformly throughout a year except for the initial investment and the salvage value at the end of the project. For this investment,the simple rate of return to the nearest tenth of a percent is:
A)43.7%
B)25.3%
C)30.4%
D)17.6%

Question

The Halsey Corporation is contemplating the purchase of new equipment that would require an initial investment of $125,000.The equipment would have a useful life of six years,with a salvage value of $29,000.This new equipment would be depreciated over its useful life by the straight-line method.It would replace existing equipment which is fully depreciated.The existing equipment has a salvage value now of $38,000.The anticipated annual revenues and expenses associated with the new equipment are:  Assume cash flows occur uniformly throughout a year except for the initial investment and the salvage value at the end of the project. For this investment,the simple rate of return to the nearest tenth of a percent is:
A)43.7% 
B)25.3% 
C)30.4% 
D)17.6%

Quizplus · Accepted Answer

The simple rate of return calculates the annual net cash inflows as a percentage of the initial investment. To calculate this, we need to first calculate the annual net cash inflows for each of the six years:

Year 1: $76,000 - $28,000 - $48,000 = $0
Year 2: $76,000 - $28,000 - $48,000 = $0
Year 3: $76,000 - $28,000 - $48,000 = $0
Year 4: $76,000 - $28,000 - $48,000 = $0
Year 5: $76,000 - $28,000 - $48,000 = $0
Year 6: $76,000 - $28,000 - $48,000 + $29,000 = $29,000

Next, we need to calculate the total net cash inflows over the six years, which is $29,000.

Finally, we can calculate the simple rate of return as follows:

Simple rate of return = Annual net cash inflows / Initial investment x 100%
Simple rate of return = $29,000 / $125,000 x 100%
Simple rate of return = 23.2%

Therefore, the best choice is B (25.3%) as none of the answer choices are an exact match and 25.3% is the closest.

The Halsey Corporation Is Contemplating the Purchase of New Equipment