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3 January, 10:35

Pierre's Hair Salon is considering opening a new location in French Lick, California. The cost of building a new salon is $310,000. A new salon will normally generate annual revenues of $68,950, with annual expenses (including depreciation) of $40,000. 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.

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  1. 3 January, 12:20
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    15%

    Explanation:

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

    = Annual net income : average investment

    where,

    Annual net income would be

    = Annual revenues - annual expenses

    = $68,950 - $40,000

    = $28,950

    And, the average investment would be

    = (Initial investment + salvage value) : 2

    = ($310,000 + $76,000) : 2

    = $386,000 : 2

    = $193,000

    Now put these values to the above formula

    So, the rate would equal to

    = $28,950 : $193,000

    = 15%
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