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Pierre's Hair Salon is considering opening a new location in French Lick, California. The cost of building a new salon is $262,000. A new salon will normally generate annual revenues of $59,710, with annual expenses (including depreciation) of $40,900. At the end of 15 years the salon will have a salvage value of $80,000. Calculate the annual rate of return on the project. (Round answer to O decimal places, e.g. 125 Annual rate of return=

Respuesta :

Annual rate of return on the project is 11%.

Define Annual rate of return.

The change in an investment's value expressed as a percentage is known as the yearly rate of return.

Annual rate of return = Average annual income ÷ average investment

where,

Average investment:

= (Initial investment + Salvage value) ÷ 2

= ($262,000+ $80,000) ÷ 2

= $ 171,000

And, Average annual income:

= $59,710 - $40,900

= $ 18,810

So, the annual rate of return:

= Average annual income ÷ average investment

= $18,810 ÷ $171,000

= 0.11

= 11%

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