Reference: 10-12
Hanley Company purchased a machine for $125,000 that will be depreciated on the straight-line basis over a five-year period with no salvage value. The related cash flow from operations is expected to be $45,000 a year. These cash flows from operations occur uniformly throughout the year.
-What is the simple rate of return on the initial investment?

Question

Quizplus · Accepted Answer

The simple rate of return is calculated by dividing the annual incremental net operating income by the initial investment. The annual depreciation is ($125,000 / 5 years) = $25,000. The annual incremental net operating income is the cash flow from operations minus the annual depreciation, which is $45,000 - $25,000 = $20,000. The simple rate of return is ($20,000 / $125,000) = 0.16, or 16%.

Reference: 10-12 Hanley Company Purchased a Machine for $125,000 That Will Be