Riverbed Oil Company is considering investing in a new oil well. It is expected that the oil well will increase annual revenues by $126,615 and will increase annual expenses by $71,000 including depreciation. The oil well will cost $443,000 and will have a $11,000 salvage value at the end of its 10-year useful life. Calculate the annual rate of return.

Question

Business

Natalie Pace

13 October, 17:58

Riverbed Oil Company is considering investing in a new oil well. It is expected that the oil well will increase annual revenues by $126,615 and will increase annual expenses by $71,000 including depreciation. The oil well will cost $443,000 and will have a $11,000 salvage value at the end of its 10-year useful life. Calculate the annual rate of return.

+2

Answers (1)

Know the Answer?

Annabelle Cline · Answer 1

12.55%

Explanation:

Annual rate of return is also known as the accounting rate of return. It is calculated by dividing net income for the period associated and the initial investment. It does not account for the time value of money, it uses the simple cash flow.

As per given data

Revenue = $126,615 per year

Expense = $71,000

Rate of return = (Revenue - Expenses) / Initial Investment = (126,615 - 71,000) / $443,000 = 0.1255 = 12.55%