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Burlington Paper Goods is considering purchasing a new delivery truck. Burlingten uses the average rate of return method to evaluate capital asset decisions.\newlineIf the initial cost of the truck is $67,000\$67,000 with a salvage value of $7,000\$7,000, and it has a before tax average annual net cash flow of $30,000\$30,000 and an annual depreciation of $15,000\$15,000, what is the average rate of retum on the truck? Asaume a 35%35\% tax rate.\newlinea) 26.35%26.35\%\newlineb) 37.23%37.23\%\newlinec) 42.59%42.59\%\newlined) 18.27%18.27\%

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Q. Burlington Paper Goods is considering purchasing a new delivery truck. Burlingten uses the average rate of return method to evaluate capital asset decisions.\newlineIf the initial cost of the truck is $67,000\$67,000 with a salvage value of $7,000\$7,000, and it has a before tax average annual net cash flow of $30,000\$30,000 and an annual depreciation of $15,000\$15,000, what is the average rate of retum on the truck? Asaume a 35%35\% tax rate.\newlinea) 26.35%26.35\%\newlineb) 37.23%37.23\%\newlinec) 42.59%42.59\%\newlined) 18.27%18.27\%
  1. Calculate Depreciation Expense: Calculate the annual depreciation expense.\newlineThe initial cost of the truck is $67,000\$67,000 and the salvage value is $7,000\$7,000. The truck's useful life is not given, but since the annual depreciation is $15,000\$15,000, we can assume this is the straight-line depreciation amount. Therefore, no calculation is needed for depreciation as it is already provided.
  2. Calculate Net Cash Flow: Calculate the annual net cash flow after taxes.\newlineThe before-tax annual net cash flow is $30,000\$30,000. To find the after-tax cash flow, we need to subtract the taxes, which are 3535\% of the cash flow.\newlineTaxes = $30,000×35%=$10,500\$30,000 \times 35\% = \$10,500\newlineAfter-tax cash flow = $30,000−$10,500=$19,500\$30,000 - \$10,500 = \$19,500
  3. Calculate Average Investment: Calculate the average investment.\newlineThe average investment is the midpoint between the initial cost and the salvage value, which is the average value of the truck over its life.\newlineAverage investment = (Initial cost+Salvage value)/2(\text{Initial cost} + \text{Salvage value}) / 2\newlineAverage investment = ($67,000+$7,000)/2=$37,000(\$67,000 + \$7,000) / 2 = \$37,000
  4. Calculate Average Rate of Return: Calculate the average rate of return.\newlineThe average rate of return is calculated by dividing the after-tax cash flow by the average investment and then multiplying by 100100 to get a percentage.\newlineAverage rate of return = (After-tax cash flow/Average investment)×100(\text{After-tax cash flow} / \text{Average investment}) \times 100\newlineAverage rate of return = ($19,500/$37,000)×100(\$19,500 / \$37,000) \times 100\newlineAverage rate of return = 0.527027027×1000.527027027 \times 100\newlineAverage rate of return = 52.70%52.70\%\newlineThis answer does not match any of the options provided, indicating a possible math error.

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