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The management of Nixon Corporation is investigating purchasing equipment that would cost $526,000 and have a...

The management of Nixon Corporation is investigating purchasing equipment that would cost $526,000 and have a 7 year life with no salvage value. The equipment would allow an expansion of capacity that would increase sales revenues by $368,000 per year and cash operating expenses by $213,000 per year. (Ignore income taxes.)

Required:

Determine the simple rate of return on the investment.

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Answer #1

Simple rate of return

= Incremental annual income/investment needed

= [368,000-213,000-(526,000/7)] / 526,000

= 79,857/526,000

= 15.2%

Note that I have rounded some numbers. Comment if you face any issues

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