Garza Company is considering buying equipment for $240,000 with a useful life of five years and an estimated salvage value of $12,000. If annual expected income is $21,000, the denominator in computing the annual rate of return is

Question

Quizplus · Accepted Answer

The formula for calculating the annual rate of return is:

Annual Rate of Return = (Annual Expected Income - Annual Depreciation) / Initial Investment

To find the annual depreciation expense, we need to subtract the salvage value from the initial investment and divide by the useful life of the equipment:

Annual Depreciation = (Initial Investment - Salvage Value) / Useful Life
Annual Depreciation = ($240,000 - $12,000) / 5
Annual Depreciation = $45,600

Now we can plug in the values and calculate the annual rate of return:

Annual Rate of Return = ($21,000 - $45,600) / $240,000
Annual Rate of Return = -$24,600 / $240,000
Annual Rate of Return = -0.103 or -10.3%

The denominator in this calculation is the initial investment, which is $240,000, so the answer is (C) $126,000.

Garza Company Is Considering Buying Equipment for $240,000 with a Useful