Finnegan Company plans to invest in a new operating plant that is expected to cost $500,000. The projected incremental income from the investment is as follows: The unadjusted rate of return (based on average investment) would be approximately:

Question

Finnegan Company plans to invest in a new operating plant that is expected to cost $500,000. The projected incremental income from the investment is as follows:  The unadjusted rate of return (based on average investment) would be approximately:

Quizplus · Accepted Answer

Unadjusted rate of return = Average incremental increase in annual net income ÷ (Net cost of original investment ÷ 2)
Unadjusted rate of return (based on average investment) = [($30,000 + $45,000 + $50,000 + $55,000 + $40,000 + $20,000) ÷ 6] ÷ ($500,000 ÷ 2) = $40,000 ÷ $250,000 = 0.16 = 16.0%

Finnegan Company Plans to Invest in a New Operating Plant