(Ignore income taxes in this problem.) An expansion at Fidell, Inc., would increase sales revenues by $75,000 per year and cash operating expenses by $38,000 per year. The initial investment would be for equipment that would cost $135,000 and have a 5 year life with no salvage value. The annual depreciation on the equipment would be $27,000. 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 the additional annual income by the initial investment. 
Additional annual income = $75,000 - $38,000 = $37,000
Initial investment = $135,000
Average annual income = ($37,000 + $0) / 2 = $18,500
Simple rate of return = Average annual income / Initial investment = $18,500 / $135,000 = 0.137 or 13.7%
Therefore, the closest option is B) 7.4%.

(Ignore Income Taxes in This Problem