A firm has an average investment of $10,000 during the year. During the same period, the firm generates after-tax income of $1,000. If the cost of capital is 15 percent, what is the net return on the investment?
A)15 percent
B)−5 percent
C)10 percent
D)5 percent

Question

Quizplus · Accepted Answer

The net return on investment is calculated by subtracting the cost of capital from the return on investment. The return on investment is $1,000/$10,000 = 10%. Subtracting the cost of capital (15%) from this gives a net return of -5%.

A Firm Has an Average Investment of $10,000 During the Year