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Neville Company is considering an investment of $380,000 in heavy equipment,which will enable the company to be more competitive in the construction industry.The useful service life of the equipment is estimated to be 10 years,with $30,000 salvage value.Straight-line depreciation is used.The company estimates that net income will increase by $41,000 per year as a result of the company's ability to handle a wider range of projects with the new equipment.
-The expected rate of return on average investment will be approximately:

Question

Quizplus · Accepted Answer

The expected rate of return on average investment is calculated as follows:Average investment = (Initial investment + Salvage value) / 2= ($380,000 + $30,000) / 2= $205,000Expected rate of return = (Annual net income increase / Average investment) * 100%= ($41,000 / $205,000) * 100%= 20%

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