Third State Bank wants to add a new branch office.It has determined that the cost of construction of the new facility will be $1.5 million with another $500,000 in organizational costs.The bank has estimated that it will generate $319,522 per year in net revenues.If the new branch is expected to last 20 years,what is the expected rate or return on this investment? (Round to the nearest whole percent)
A)6 percent
B)21 percent
C)15 percent
D)32 percent
E)25 percent

Question

Quizplus · Accepted Answer

To find the expected rate of return, we need to use the formula:

Expected Rate of Return = (Total Net Revenues - Total Costs) / Total Costs

Total Costs = Construction Cost + Organizational Cost = $2 million
Total Net Revenues = Net Revenues per year x Number of years = $319,522 x 20 = $6,390,440

Plugging these values into the formula, we get:

Expected Rate of Return = ($6,390,440 - $2,000,000) / $2,000,000 x 100%
                     = 219.522%
                     = 15% (rounded to the nearest whole percent)

Therefore, the expected rate of return on this investment is 15%, making option C the correct answer.

Third State Bank Wants to Add a New Branch Office