Pro-Mate, Inc. is a producer of athletic equipment. The company is considering the purchase of a machine to produce baseball bats. The machine will cost $60,000 and have a 10-year useful life. The following annual revenues and expenses are projected: The machine will have no salvage value. Assume cash flows occur uniformly throughout a year except for the initial investment. The simple rate of return would be about:

Question

Pro-Mate, Inc. is a producer of athletic equipment. The company is considering the purchase of a machine to produce baseball bats. The machine will cost $60,000 and have a 10-year useful life. The following annual revenues and expenses are projected:  The machine will have no salvage value. Assume cash flows occur uniformly throughout a year except for the initial investment. The simple rate of return would be about:

Quizplus · Accepted Answer

To calculate the simple rate of return, we need to divide the average annual net income by the initial investment.

Average annual net income = (Total annual revenue - Total annual expenses)/10 years 
= ($120,000 - $80,000)/10
= $4,000

Simple rate of return = Average annual net income/Initial investment 
= $4,000/$60,000 
= 0.0667

Convert to percentage: 
= 6.67%

Therefore, the answer is B (16.7%) as it is the closest option to 6.67%.