An investment cost $80,000 with no salvage value, a 5 year useful life, and had an expected annual increase in net income of $7,000. Straight line depreciation is used. What is the expected rate of return on this investment?

Question

Quizplus · Accepted Answer

- The annual net income increase of $7,000 is a cash inflow, so it is considered in the calculation of the expected rate of return.
- Straight line depreciation is used, meaning that the depreciation expense is the same each year.
- The depreciation expense can be calculated as the cost of the investment divided by its useful life:
$80,000 / 5 years = $16,000 per year
- The total annual cash inflow is therefore:
$7,000 + $16,000 = $23,000 per year
- The expected rate of return can now be calculated as:
($23,000 / $80,000) x 100% = 28.75%
- Rounding this to one decimal place gives an expected rate of return of 28.8%, which is closest to choice C (8.8%). Therefore, choice C is the best answer.

An Investment Cost $80,000 with No Salvage Value, a 5