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: $$\begin{array} { l c }
\text { Year } & \text { Net Income After Tax } \
1 & \$ 30,000 \
2 & \$ 45,000 \
3 & \$ 50,000 \
4 & \$ 55,000 \
5 & \$ 40,000 \
6 & \$ 20,000
\end{array}$$ The unadjusted rate of return on the initial 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: $$\begin{array} { l c } 
\text { Year } & \text { Net Income After Tax } \
1 & \$ 30,000 \
2 & \$ 45,000 \
3 & \$ 50,000 \
4 & \$ 55,000 \
5 & \$ 40,000 \
6 & \$ 20,000
\end{array}$$ The unadjusted rate of return on the initial investment would be approximately:

Quizplus · Accepted Answer

The unadjusted rate of return is calculated by dividing the average annual net income after tax by the initial investment. The average annual net income after tax is ($30,000 + $45,000 + $50,000 + $55,000 + $40,000 + $20,000) / 6 = $40,000. The unadjusted rate of return is $40,000 / $500,000 = 8.0%.

Finnegan Company Plans to Invest in a New Operating Plant