$\begin{array}{l}
\text { Oriental Company has gathered the following data on a proposed investment project: }\
\begin{array} { | l | r | }
\hline \text { Investement in Depreciable Equipment } & \$ 200,000 \
\hline
\end{array}
\end{array}$
$\begin{array}{|l|r|}
\hline \text { Annual Net Cash Flows } & \$ 50,000 \
\hline \text { Life of the Equipment } & 10 \text { years } \
\hline \text { Salvage Value } & -0- \
\hline \text { Discount Rate } & 10 \%\\hline
\end{array}$
The company uses straight-line depreciation on all equipment. (Ignore income taxes in this problem.)
-What would be the simple rate of return on the investment?
A) 10%.
B) 15%.
C) 25%.
D) 35%.

Question

$\begin{array}{l}
\text { Oriental Company has gathered the following data on a proposed investment project: }\
\begin{array} { | l | r | } 
\hline \text { Investement in Depreciable Equipment } & \$ 200,000 \
\hline
\end{array}
\end{array}$
$\begin{array}{|l|r|}
\hline \text { Annual Net Cash Flows } & \$ 50,000 \
\hline \text { Life of the Equipment } & 10 \text { years } \
\hline \text { Salvage Value } & -0- \
\hline \text { Discount Rate } & 10 \%\\hline
\end{array}$
The company uses straight-line depreciation on all equipment. (Ignore income taxes in this problem.)
-What would be the simple rate of return on the investment?
A) 10%.
B) 15%.
C) 25%.
D) 35%.

Quizplus · Accepted Answer

The simple rate of return is calculated as the annual incremental net operating income divided by the initial investment. Here, the annual depreciation is $20,000 ($200,000/10 years), so the annual net operating income is $30,000 ($50,000 - $20,000). The simple rate of return is $30,000 / $200,000 = 15%.

The Company Uses Straight-Line Depreciation on All Equipment