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Newport Corporation is considering investing $65,000 in equipment to produce a new product.The useful service life of the equipment is estimated to be ten years,with no salvage value.Straight-line depreciation is used.The company estimates that production and sale of the new product will increase net income by $6,500 per year.
-The expected rate of return on average investment in this equipment is:

Question

Quizplus · Accepted Answer

To find the expected rate of return on average investment in this equipment, we can use the formula: (Increase in Net Income from Equipment / Average Investment in Equipment) x 100%.

First, we need to calculate the average investment in the equipment. Since the equipment has a useful service life of ten years with no salvage value, the depreciable cost of the equipment is $65,000 / 10 = $6,500 per year. Therefore, the average investment in the equipment is ($65,000 + 0) / 2 = $32,500.

Next, we can calculate the increase in net income from the equipment by multiplying the expected annual increase in net income ($6,500) by the number of years of useful service life (10). This gives us an increase in net income of $65,000.

Plugging these values into the formula, we get:

(Expected Increase in Net Income / Average Investment) x 100%
= ($65,000 / $32,500) x 100%
= 200%

Therefore, the expected rate of return on average investment in this equipment is 200%, or 20%. The best choice is B.

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