30. The management of P Corporation is considering purchasing equipment that wou

Question

30. The management of P Corporation is considering purchasing equipment that would increase sales revenues by $269,000 per year, and increase cash operating expenses by $156,000 per year. The equipment would cost $294,000, and have a 6-year life with no salvage value. The annual depreciation would be $49,000. The simple rate of return on the investment is closest to: A) 16.7% B) 21.8% C) 23.8% D) 38.4% 31. A corporation is considering purchasing equipment that would increase sales revenues by $298.000 per year, and increase cash operating expenses by $143,000 per year. The equipment would cost $712,000, and have an 8-year life with no salvage value. The annual depreciation would be $89,000. The simple rate of return on the investment is closest to: A) 9.3% B) 21.8% C) 22.1% D) 12.5% 32. The following data concern an investment project $180,000 ..$42,000 Annual net cash inflows Working capital required. Life of the project. Required rate of retur. Salvage value of the equipment.$70,000 $20,000 5 years 12% The working capital will be released for use elsewhere at the conclusion of the project s this project acceptable? Support your answer by showing the calculation of the project's net present alue

Explanation / Answer

31. solution

Annual incremental sales revenue                           269000

Annual incremental expenses:

     Annual cash operating expenses         156000

    Annual Depreciation                                   49000    (205000)

Annual incremental net operating income            64000

Simple rate of return = Annual incremental net operating income / Initial investment
= $64000 / $294000 = 21.8% (rounded)

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