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Lazar Corporation is evaluating a proposal to invest in a machine costing $89,000.The machine has an estimated useful life of ten years,and an estimated salvage value of $14,000.The machine will increase the company's net income by approximately $9,600 per year.All revenue and expenses other than depreciation will be received and paid in cash.
-The expected rate of return on average investment of the machine is:

Question

Quizplus · Accepted Answer

The expected rate of return on average investment of the machine is calculated using the formula: 
(expected annual net income/initial investment + salvage value)/2
Expected annual net income = $9,600 
Initial investment = $89,000 
Salvage value = $14,000 
(expected annual net income/initial investment + salvage value)/2 = ($9,600/($89,000+$14,000))/2 = 0.186 or 18.6%

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