John has invested in a machine that cost $70,000, that has a useful life of seven years, and that has no salvage value at the end of its useful life. The machine is being depreciated by the straight-line method, based on its useful life. It will have a payback period of four years. Given these data, the simple rate of return on the machine is closest to:
A)7.1%.
B)8.2%.
C)10.7%.
D)39.3%
As this is your third post at least, let me try help guide your thinking. BTW, accounting is not my area of expertise.
My short answer is: none of the above. Check to make sure you have given all of the information. If I have to pick one, I would go with D, 39.3%
What you have is a case where a $70,000 investment pays for itself in 4 years -- correct? So, the simple (non-compounding) rate of return should be 25%
However, your question adds a depreciation wrinkle. With SL depreciation the firm will deduct 4/7 of the 70,000 over 4 years. At a hefty 35% marginal tax rate, the value of the deduction is 70000*(4/7)*.35=14000, or $3500 per year, or 5% per year. So, assuming the return from the machine is magically untaxed, and the return is $70000 over 4 years, and the firm gets the 3500 (5%) depreciation, the rate of return becomes 30%. This is the best rate of return I can come up with, and it requires heroic assumptions.
I have tried, none of the answers seems to fit. But again, this is not my area.
Thanks for trying, at least now I have a better idea how to tackle it. Thanks.
I appreciate your effort in attempting to solve the problem. Accounting can be complex, so let me explain how to approach it step by step.
To calculate the simple rate of return, we need the initial investment, the annual returns, and the duration of the investment. In this case, we have the following information:
Initial investment: $70,000
Useful life: 7 years
Payback period: 4 years
The payback period is the time it takes for the investment to generate returns equal to the initial investment. In this case, the payback period is 4 years. However, the payback period does not take into account the time value of money or the impact of depreciation.
To calculate the simple rate of return, we need to find the average annual return over the useful life of the investment. Since the machine has no salvage value at the end of its useful life, the average annual return is the initial investment divided by the useful life.
Average annual return = Initial investment / Useful life
Average annual return = $70,000 / 7 years
Average annual return = $10,000
Now, we can calculate the simple rate of return by dividing the average annual return by the initial investment and expressing it as a percentage.
Simple rate of return = (Average annual return / Initial investment) x 100
Simple rate of return = ($10,000 / $70,000) x 100
Simple rate of return = 14.29%
Based on these calculations, the closest option to the simple rate of return is 14.29%. Unfortunately, none of the provided answer options match this result. It's possible that there is missing information or an error in the question.