Question

Studio Films is considering the purchase of some new film equipment that costs $250,000. It has a 5 year useful life with no salvage value. The new equipment is expected to increase revenues by $115,000 annually. Annual incremental cash operating expenses are expected to be $40,000. The simple rate of return of the equipment is [blank] %. (Enter your answer as a whole number.)

Answer 1

To calculate the simple rate of return, you can use the formula:

\[
\text{Simple Rate of Return} = \left( \frac{\text{Annual Incremental Revenues} - \text{Annual Incremental Cash Operating Expenses}}{\text{Initial Investment}} \right) \times 100
\]

Let's plug in the values from the problem:

- Annual Incremental Revenues = $115,000
- Annual Incremental Cash Operating Expenses = $40,000
- Initial Investment = $250,000

First, we calculate the annual operating income:

\[
\text{Annual Operating Income} = \text{Annual Incremental Revenues} - \text{Annual Incremental Cash Operating Expenses}
\]

\[
\text{Annual Operating Income} = 115,000 - 40,000 = 75,000
\]

Now, we can calculate the simple rate of return:

\[
\text{Simple Rate of Return} = \left( \frac{75,000}{250,000} \right) \times 100
\]

\[
\text{Simple Rate of Return} = 0.3 \times 100 = 30\%
\]

So, the simple rate of return of the equipment is **30%**.