A firm has an average investment of $10,000 during the year. During the same time, the firm generates after-tax income of $2,000.
If the cost of capital is 15 percent, what is the net return on the investment?
A)5 percent
B)20 percent
C)15 percent
D)10 percent

Question

Quizplus · Accepted Answer

The net return on investment is calculated as the after-tax income divided by the average investment. Here, it is $2,000 / $10,000 = 0.2 or 20%. To find the net return, subtract the cost of capital (15%) from this figure, resulting in a net return of 5%.

A Firm Has an Average Investment of $10,000 During the Year