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.

Answer 1

Concepts and reason

Annual rate of return: It is the rate of return which is earned by a company on its investment on an annual basis. It is calculated by dividing total inflows by initial investment and dividing the same by the useful life of the investment.

Fundamentals

Revenue: Revenue is the income of the company which is earned by it performing its business activities.

Expenses: It means the amount incurred or to be incurred by the company for carrying out its business activities and is not a capitalized.

Depreciation: It is that part of tangible asset which is allocated to each period on the basis of its useful life and is considered as normal wear and tear of the asset due to its use.

Salvage value: Salvage value is the value received when the asset is sold after its use in the market.

Useful life: It is the life of the asset which is expected for which that the asset will be available for use and will be able to perform its functions.

Net income: Net income is the amount arrived when credit side of the income statement is greater than the debit side. Debit side comprises of total cost of goods sold, expenses and contra-revenue whereas credit side comprises total revenue and contra-cost of goods sold.

Ans:

Annual rate of return of the company is 24%.