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3 December, 05:49

A project that cost $80000 with a useful life of 5 years is being considered. Straight-line depreciation is being used and salvage value is $5000. The project will generate annual revenues of $22650. The annual rate of return is:

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  1. 3 December, 06:17
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    8.13%

    Explanation:

    Annual return = [ (Total FV/Initial investment) ^ (1/n) ] - 1

    n = useful life of the project

    Total Future Value = (22650*5) + 5000

    Total FV = $118,250

    Initial investment = $80,000

    Annual return = [ (118,250/80,000) ^ (1/5) ] - 1

    r = [ (1.478125^ (1/5) ] - 1

    r = 1.0813 - 1

    r = 0.0813 or 8.13%
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