A company is considering purchasing factory equipment that costs $400,000 and is estimated to have no salvage value at the end of its 5-year useful life.If the equipment is purchased, annual revenues are expected to be $150,000 and annual operating expenses exclusive of depreciation expense are expected to be $25,000.The straight-line method of depreciation would be used.If the equipment is purchased, the annual rate of return expected on this equipment is

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The annual depreciation expense is $400,000 / 5 = $80,000. The annual net income is $150,000 (revenue) - $25,000 (expenses) - $80,000 (depreciation) = $45,000. The annual rate of return is $45,000 / $400,000 = 11.25%.

A Company Is Considering Purchasing Factory Equipment That Costs $400,000