Atlantic Company is considering investing in specialized equipment costing $360,000. The equipment has a useful life of 5 years and a residual value of $45,000. Depreciation is calculated using the straight-line method. The expected net cash inflows from the investment are:
$$\begin{array} { | l | r | }
\hline \text { Year 1 } & \$ 160,000 \
\hline \text { Year 2 } & 130,000 \
\hline \text { Year 3 } & 100,000 \
\hline \text { Year 4 } & 55,000 \
\hline \text { Year 5 } & 40,000 \
\hline & \$ 485,000 \
\hline
\end{array}$$
What is the rate of return on the investment?

Question

Atlantic Company is considering investing in specialized equipment costing $360,000. The equipment has a useful life of 5 years and a residual value of $45,000. Depreciation is calculated using the straight-line method. The expected net cash inflows from the investment are:
$$\begin{array} { | l | r | } 
\hline \text { Year 1 } & \$ 160,000 \
\hline \text { Year 2 } & 130,000 \
\hline \text { Year 3 } & 100,000 \
\hline \text { Year 4 } & 55,000 \
\hline \text { Year 5 } & 40,000 \
\hline & \$ 485,000 \
\hline
\end{array}$$
What is the rate of return on the investment?

Quizplus · Accepted Answer

The rate of return on the investment is 16.8%. This is calculated by dividing the average annual net cash inflow of $97,000 by the initial investment of $360,000 and multiplying by 100.

Atlantic Company Is Considering Investing in Specialized Equipment Costing $360,000