Mussina Company had an investment which cost $250,000 and had a salvage value at the end of its useful life of zero. If Mussina's expected annual net income is $15,000, the annual rate of return is:

Question

Quizplus · Accepted Answer

We can calculate the annual rate of return using the following formula: 
Annual rate of return = (Expected annual net income / Initial investment) x 100%
Annual rate of return = ($15,000 / $250,000) x 100% = 6%
However, since the salvage value at the end of the investment's useful life is zero, we need to adjust for this by using the following formula: 
Annual rate of return = (Expected annual net income / (Initial investment - Salvage value)) x 100%
Annual rate of return = ($15,000 / ($250,000 - $0)) x 100% = 6.0%
Therefore, the annual rate of return is 12.0% (Choice C) because we need to use the adjusted formula.

Mussina Company Had an Investment Which Cost $250,000 and Had