A company projects an increase in net income of $180000 each year for the next five years if it invests $900000 in new equipment. The equipment has a five-year life and an estimated salvage value of $300000. What is the annual rate of return on this investment?
A) 30%
B) 20%
C) 40%
D) 60%

Question

Quizplus · Accepted Answer

The annual rate of return is calculated as (Net income - Depreciation) / Initial investment. The net income is $180,000 per year, the depreciation is ($900,000 - $300,000) / 5 = $120,000 per year, and the initial investment is $900,000. Therefore, the annual rate of return is ($180,000 - $120,000) / $900,000 = 30%.

A Company Projects an Increase in Net Income of $180000