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

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

Quizplus · Accepted Answer

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

Finnegan Company Plans to Invest in a New Operating Plant