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%

Question

Business

Richard Copeland

10 March, 13:49

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%

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Keegan Parsons · Answer 1

C) 23.8 %

Explanation:

Ther total profitability from the purchase of the equipment is as follows:

Incremental sales revenues: $ 269,000

Incremental operating expenses: $ 156,000

$ 113,000

Depreciation on the equipment $ 49,000

Net profitability on new equipment $ 64,000

Return on equipment purchased (64,000/269,000) = 23.79 %