Joetz corporation has gathered the following data on a proposed investment project (ignore income taxes.):
investment required in equipment $ 30,000
annual cash inflows $ 6,000
salvage value of equipment $ 0
life of the investment 15 years
required rate of return 10 %
the company uses straight-line depreciation on all equipment. assume cash flows occur uniformly throughout a year except for the initial investment.
the simple rate of return for the investment (rounded to the nearest tenth of a percent) is:
multiple choice
a. 16%
b. 18%
c. 20%
d. 22%

13.3%

Explanation:

The formula to compute the simple accounting rate of return is shown below:

= Annual net income ÷ average investment

where,  

Average investment is $30,000

And, the net income would be

= Annual net cash flows - depreciation expense

= $6,000 - $2,000

= $4,000

The depreciation expense

=  (Original cost - residual value) ÷ (useful life)  

= ($30,000 - $0) ÷ (15 years)  

= ($30,000) ÷ (15 years)  

= $2,000

Now put these values to the above formula  

So, the rate would equal to

= $4,000 ÷ $30,000

= 13.3%

This is the answer and the same is not given in the options

answer; the correct answer should be (demonstrations); good luck

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