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. Increase in revenue 30,000 Increase in expenses 10,800 X 19,200 (7,700) 14,300 X Pretax income from investment Income tax expense Round answer to the nearest whole percentage, if applicable Average rate of return on investment 114.3 X % Check

Explanation / Answer

Computation of Annual Net Income from desired proposal

Increase in Revenue - $ 30000

Increase in expenses - $ 8000

Net Increase in Profit -- $ 22000

Less: Depreciation

(100000)/10 - as they are following straight line method of depreciation -- $ 10000

Earnings Before Tax -- $ 12000

Less: Tax @ 35% -- $ 4200

Earnings after tax per year -- $ 7800

Earnings for 10 years = $ 7800 * 10 = $ 78000

Investment = $ 100000

Rate of return on investment = $ 78000/$100000 = 78%.

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