Wombles Corporation is contemplating purchasing equipment that would increase sales revenues by $478,000 per year and cash operating expenses by $249,000 per year. The equipment would cost $738,000 and have a 9 year life with no salvage value. The annual depreciation would be $82,000. The simple rate of return on the investment is closest to:

Question

Quizplus · Accepted Answer

The simple rate of return is calculated as (Incremental Net Operating Income / Initial Investment). Incremental Net Operating Income = Incremental Revenue - Incremental Expenses - Depreciation = $478,000 - $249,000 - $82,000 = $147,000. Simple Rate of Return = $147,000 / $738,000 = 19.9%.

Wombles Corporation Is Contemplating Purchasing Equipment That Would Increase Sales