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18 April, 12:13

Salt Company is considering investing in a new facility to extract and produce salt. The facility will increase revenues by $220,000, but it will also increase annual expenses by $160,000. The facility will cost $980,000 to build, and it will have a $20,000 salvage value at the end of its useful life. Calculate the annual rate of return on this facility. Annual rate of return %

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  1. 18 April, 15:11
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    12%

    Explanation:

    Annual net income:

    = Increase in annual revenue - Increase in annual costs

    = $220,000 - $160,000

    = $60,000

    Average investment:

    = (Initial investment + Salvage value at the end) : 2

    = (980,000 + 20,000) : 2

    = $500,000

    Annual rate of return:

    = (Annual net income : Average investment) * 100

    = ($60,000 : $500,000) * 100

    = 12%
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