(Ignore income taxes in this problem. )Hartong Corporation is contemplating purchasing equipment that would increase sales revenues by $185,000 per year and cash operating expenses by $89,000 per year.The equipment would cost $416,000 and have a 8 year life with no salvage value.The annual depreciation would be $52,000.The simple rate of return on the investment is closest to:

Question

Quizplus · Accepted Answer

To calculate the simple rate of return, we need to divide incremental annual net operating income (increase in revenue - increase in operating expenses - annual depreciation) by the initial investment:

Incremental annual net operating income = $185,000 - $89,000 - $52,000 = $44,000

Simple rate of return = Incremental annual net operating income / Initial investment = $44,000 / $416,000 = 0.1058 or 10.6%

Therefore, the best choice is C with a simple rate of return of 10.6%.

(Ignore Income Taxes in This Problem