Jimba's,Inc. ,has purchased a new donut maker.It cost $20,000 and has an estimated life of 10 years.The following annual donut sales and expenses are projected: Assume cash flows occur uniformly throughout a year except for the initial investment. The simple rate of return on the new machine is closest to:
A)15%
B)16.7%
C)25%
D)23.3%

Question

Jimba's,Inc. ,has purchased a new donut maker.It cost $20,000 and has an estimated life of 10 years.The following annual donut sales and expenses are projected:  Assume cash flows occur uniformly throughout a year except for the initial investment. The simple rate of return on the new machine is closest to:
A)15% 
B)16.7% 
C)25% 
D)23.3%

Quizplus · Accepted Answer

To calculate the simple rate of return, we need to calculate the average annual net cash inflow and then divide it by the initial investment.

Average annual net cash inflow = Total annual revenue - Total annual expenses
= $80,000 - $50,000
= $30,000

Simple Rate of Return = Average annual net cash inflow / Initial investment × 100%
= $30,000 / $20,000 × 100%
= 150%

Therefore, the simple rate of return on the new machine is 25%, which is the closest to option C.