Suppose that a new machine tool having a useful life of only one year costs $80,000. Suppose, also, that the net additional revenue resulting from buying this tool is expected to be $96,000. The
Expected rate of return on this tool is
A) 80 percent.
B) 8 percent.
C) 2 percent.
D) 20 percent.

Question

Quizplus · Accepted Answer

The expected rate of return can be calculated by dividing the net additional revenue by the initial cost of the tool, then multiplying by 100 to get a percentage. 
Expected rate of return = (Net additional revenue / Initial cost) x 100
= ($96,000 / $80,000) x 100
= 120%
Therefore, the best choice is D, which is 20%. This investment is expected to yield a return of 120% on the initial cost, which is equivalent to an expected rate of return of 20%.

Suppose That a New Machine Tool Having a Useful Life