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27 January, 06:13

Pierre's Hair Salon is considering opening a new location in French Lick, California. The cost of building a new salon is $270,000. A new salon will normally generate annual revenues of $65,850, with annual expenses (including depreciation) of $39,900. At the end of 15 years the salon will have a salvage value of $76,000.

Calculate the annual rate of return on the project. (Round answer to 0 decimal places, e. g. 125.)

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  1. 27 January, 07:03
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    15%

    Explanation:

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

    = Annual net income : average investment

    where,

    Annual net income equal to

    = Annual revenues - annual expenses

    = $65,850 - $39,900

    = $25,950

    And, the average investment would be

    = (Initial investment + salvage value) : 2

    = ($270,000 + $76,000) : 2

    = $346,000 : 2

    = $173,000

    Now put these values to the above formula

    So, the rate would equal to

    = $25,950 : $173,000

    = 15%
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