Question

Barron Chemical uses a thermoplastic polymer to enhance the appearance of certain RV panels. The initial cost of one process was $120.000 with annual costs of $50,000, Revenues are $85,000 in year 1. Increasing by $1000 per year. A salvage value of $24,000 was realized when the process was discontinued after 8 years. What rate of return did the company make on the process? The rate of retum made by the company is

Answer 1

The annual revenue and expenses associated with process is shown in the table : -

Year	Revenue	Cost	Net income = Revenue - cost
1	$85,000	$50,000	$35,000
2	$86,000	$50,000	$36,000
3	$87,000	$50,000	$37,000
4	$88,000	$50,000	$38,000
5	$89,000	$50,000	$39,000
6	$90,000	$50,000	$40,000
7	$91,000	$50,000	$41,000
8	$92,000	$50,000	$42,000
			∑ Annual net income = $ 308000

Average annual income Rate of return Average investment

Annual net income $308000 $38500 Average annual income No of years 8

$120000 $24000 Initial cost + Salvage value $72000 Average investment = 2 2

$38500 Rate of return $72000

Rate of return made by the company is 53.47%