Ducey Corporation is contemplating purchasing equipment that would increase sales revenues by $79,000 per year and cash operating expenses by $27,000 per year. The equipment would cost $150,000 and have a 6 year life with no salvage value. The annual depreciation would be $25,000. (Ignore income taxes.)Required:Determine the simple rate of return on the investment to the nearest tenth of a percent.
What will be an ideal response?
| Annual incremental revenues | $ | 79,000 | ||
| Annual incremental expenses: | ||||
| Annual cash operating expenses | $ | 27,000 | ||
| Annual depreciation ($150,000 - $0)/6 | 25,000 | 52,000 | ||
| Annual incremental net operating income | $ | 27,000 | ||
Simple rate of return = Annual incremental net operating income ÷ Initial investment
= $27,000 ÷ $150,000 = 18.0%
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