Farmer Joe is planning to purchase a new hog farm. He anticipates making $20,000 the first year, $25,000 the second year and $30,000 the third year. The farm is currently listed for sale at $200,000. What is the simple rate-of-return on the original investment?

The simple rate of return is 37.5%

Explanation:

Simple rate of return is the percentage of return on investment that takes the net annual return cash flow of an investment and compare with initial capital of the investment. It is calculated with this formula:

Total annual return - Depreciation expense

Initial capital outlay

For farmer Joe, the simple rate of return is:

$20,000 + $25,000 + $30,0000 - $0 x 100

$200,000

= $75,000 x 100

$200,000

= 37.5%

Depreciation expense is assumed to be zero.