Hanley Company has purchased a machine for $125,000 that will be depreciated on the straight-line basis over a five-year period with no salvage value. The related cash flow from operations is expected to be $45,000 a year. These cash flows from operations occur uniformly throughout the year. (Ignore income taxes in this problem.)
-What is the simple rate of return on the initial investment?
A) 16%.
B) 24%.
C) 28%.
D) 36%.

Question

Quizplus · Accepted Answer

The simple rate of return is calculated by dividing the annual incremental net operating income by the initial investment. The annual depreciation expense is $125,000 / 5 = $25,000. The annual incremental net operating income is the cash flow from operations minus the annual depreciation expense, which is $45,000 - $25,000 = $20,000. Therefore, the simple rate of return is $20,000 / $125,000 = 0.16, or 16%.

Hanley Company Has Purchased a Machine for $125,000 That Will