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16 July, 14:55

Pierre's Hair Salon is considering opening a new location in French Lick, California. The cost of building a new salon is $284,000. A new salon will normally generate annual revenues of $60,490, with annual expenses (including depreciation) of $40,800. At the end of 15 years the salon will have a salvage value of $74,000 Calculate the annual rate of return on the project.

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  1. 16 July, 18:03
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    11%

    Explanation:

    The computation of the annual rate of return is shown below:

    Annual rate of return = Average annual income : average investment

    where,

    Average investment = (Initial investment + Salvage value) : 2

    = ($284,000 + $74,000) : 2

    = $179,000

    And,

    Average annual income is

    = $60,490 - $40,800

    = $19,690

    So, the annual rate of return is

    = $19,690 : $179,000

    = 11%

    We simply applied the above formula
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