Comet Powder Company has purchased a piece of equipment costing $100,000. It is expected to generate a 10-year stream of benefits amounting to $16,273 per year. Determine the rate of return Comet expects to earn from this equipment.

Question

Quizplus · Accepted Answer

To determine the rate of return, we need to use the formula: 
Rate of return = (Total benefits - Cost of equipment) / Cost of equipment

Plugging in the numbers: 
Rate of return = ($16,273 x 10 - $100,000) / $100,000 
Rate of return = $62,730 / $100,000 
Rate of return = 0.6273 or 62.73%

However, we need to keep in mind that the question asks for the rate of return expected by Comet, not the actual rate of return. Therefore, we can assume that Comet expects to earn a rate of return equal to the discount rate they use in their calculations. Since the benefits are spread over 10 years, we can assume that the discount rate is also the annual rate of return.

So, the expected rate of return would be the discount rate used by Comet, which we do not have access to. The closest answer choice is 10%, so the best choice is C.

Comet Powder Company Has Purchased a Piece of Equipment Costing