Addison Corporation is considering the purchase of equipment that would increase sales revenues by $250,000 per year and cash operating expenses by $100,000 per year. The equipment would cost $400,000 and have a 5-year life with no salvage value. The simple rate of return on the investment is closest to ___

a) 17.5%

b) 20.0%

c) 25.5%

d) 35.0%

a) 17.5%

Explanation:

The computation of the simple rate of return on the investment is shown below:

Simple rate of return = Annual net income : Initial investment

where,

Annual net income is

= Sales revenue - cash operating expenses - depreciation expenses

= $250,000 - $100,000 - ($400,000 : 5)

= $70,000

And, the initial investment is $400,000

So, the simple rate of return is

= $70,000 : $400,000

= 17.5%

Dividing the annual net income by the initial investment we can get the simple rate of return