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