Knowledge Check 01 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%

C. 25.5%

Explanation:

Net operating cashflow = (250,000 - 100,000) = 150,000; This is a recurring cashflow; the PMT

Cost of equipment; the PV = 400,000

Next, calculate the rate of return using Net operating cashflow per year and the equipment cost. You can do this with a financial calculator;

N = 5

PMT = 150,000

FV = 0

PV = - 400,000

then CPT I/Y = 25.41%

Therefore the return is closest to 25.5%