Mecha Oil Company is considering investing in a new oil well. It is expected that the oil well will increase annual revenues by $122,000 and will increase annual expenses by $85,600 including depreciation. The oil well will cost $496,000 and will have a $9,840 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.)
We have been provided with the information as follow
| Initial Investment | $496,000 |
| increase annual revenues | $122,000 |
| increase annual expenses | $85,600 |
| Net increase =122000-85600 |
$36,400 |
Annual rate if return is based on the initial investment
=122000-85600/496000
=0.0734
=7.34%
If Annual rate if return is based on the Average investment
| Initial Investment | $496,000 |
| Salvage value | $9,840 |
| Total | $505,840 |
| Devided by 2 =505840/2 |
$252,920 |
ARR = 36400/252920
=0.1439
=14.39%
