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 find the average annual net income from the machine, which is (revenues - expenses)/useful life.

Average annual net income = ($20,000 - $12,000)/10 = $800

Then, we divide the average annual net income by the initial investment to find the simple rate of return:

Simple rate of return = $800/$60,000 = 0.0133 or 13.3%

Multiplying by 100 gives us 16.7%. Therefore, the best choice is B.