Average Rate of Return Clancy Company is considering the purchase of equipment f

Question

Average Rate of Return
Clancy Company is considering the purchase of equipment for $100,000. The equipment will expand the company’s production and increase revenue by $30,000 per year. Annual cash operating expenses will increase by $8,000. The equipment’s useful life is 10 years with no salvage value. Clancy uses straight-line depreciation. The income tax rate is 35%. What is the average rate of return on the investment?

Do not use negative signs with your answers.

Round answer to the nearest whole percentage, if applicable.

Average rate of return on investment

Answer%

Increase in revenue $Answer Increase in expenses Answer Pretax income from investment Answer Income tax expense Answer Net income from investment $Answer

Explanation / Answer

Calculate net income from investment :

Average investment = (100000+0)/2 = 50000

Average rate of return on investment = 7800*100/50000 = 15.6% or 16%

Increase in revenue 30000 Increase in expenses (100000/10+8000) 18000 Pretax income from investment 12000 Income tax expense 4200 Net income from investment 7800

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