(Ignore income taxes in this problem.) Isomer Industrial Training Corporation is considering the purchase of new presentation equipment at a cost of $150,000. The equipment has an estimated useful life of 10 years with an expected salvage value of zero. The equipment is expected to generate net cash inflows of $35,000 per year in each of the 10 years. Isomer's discount rate is 16%. Isomer uses the straight-line method of depreciation for its assets.
-What is the simple rate of return of the presentation equipment?

Question

Quizplus · Accepted Answer

The simple rate of return is calculated as the annual incremental net operating income divided by the initial investment. The annual depreciation is $15,000 ($150,000/10 years). The annual net operating income is $20,000 ($35,000 - $15,000). The simple rate of return is $20,000 / $150,000 = 13.3%.

(Ignore Income Taxes in This Problem