Question

Swift Oil Company is considering investing in a new oil well. It is expected that the oil well will increase annual revenues by $130,000 and will increase annual expenses by $70,000 including depreciation. The oil well will cost $490,000 and will have a $10,000 salvage value at the end of its 10-year useful life. Calculate the annual rate of return. (Round answer to 2 decimal places, e.g. 12.47.)

Answer 1

Answer: Annual rate of return = 24%.

Explanation:

Given that,

oil well will increase annual revenues by $130,000 and will increase annual expenses by $70,000 including depreciation

Cost of oil well = $490,000

$10,000 salvage value at the end of its 10-year useful life

Net Income = Annual revenue - annual expenses

= 130000 - 70000

= $60000

Average investment = $\frac{490000+10000}{2}$

= $250000

∴ Annual rate of return = $\frac{Net\ Income}{Average\ Investment} \times 100$

=  $\frac{60000}{250000} \times 100$

= 24%