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Burlington Paper Goods is considering purchasing a new delivery truck. Burlington uses the average rate of return method to evaluate capital asset decisions.
If the initial cost of the truck is
$67,000 with a salvage value of
$7,000, and it has a before tax average annual net cash fiow of
$30,000 and an annual depreciation of
$15,000, what is the average rate of retum on the truck Assume a
35% tax rate.
a)
26.35%
b)
37.23%
c)
42.59%
d)
18.27%

Burlington Paper Goods is considering purchasing a new delivery truck. Burlington uses the average rate of return method to evaluate capital asset decisions. $\newline$ If the initial cost of the truck is $\$ 67,000$ with a salvage value of $\$ 7,000$ , and it has a before tax average annual net cash fiow of $\$ 30,000$ and an annual depreciation of $\$ 15,000$ , what is the average rate of retum on the truck Assume a $35 \%$ tax rate. $\newline$ a) $26.35 \%$ $\newline$ b) $37.23 \%$ $\newline$ c) $42.59 \%$ $\newline$ d) $18.27 \%$

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Volume of cubes and rectangular prisms: word problems

Full solution

Q. Burlington Paper Goods is considering purchasing a new delivery truck. Burlington uses the average rate of return method to evaluate capital asset decisions.

\newline

If the initial cost of the truck is

\$ 67,000

with a salvage value of

\$ 7,000

, and it has a before tax average annual net cash fiow of

\$ 30,000

and an annual depreciation of

\$ 15,000

, what is the average rate of retum on the truck Assume a

35 \%

tax rate.

\newline

a)

26.35 \%

\newline

b)

37.23 \%

\newline

c)

42.59 \%

\newline

d)

18.27 \%

Calculate Average Investment: Calculate the average investment. $\newline$ The average investment is the sum of the initial cost and the salvage value, divided by $2$ . $\newline$ Average Investment = $(\text{Initial Cost} + \text{Salvage Value}) / 2$ $\newline$ Average Investment = $(\$67,000 + \$7,000) / 2$ $\newline$ Average Investment = $\$74,000 / 2$ $\newline$ Average Investment = $\$37,000$
Calculate Annual Net Cash Flow: Calculate the annual net cash flow after taxes. $\newline$ To find the after-tax cash flow, we subtract the tax impact of the depreciation from the before-tax cash flow. $\newline$ Tax savings from depreciation = Depreciation $\times$ Tax Rate $\newline$ Tax savings from depreciation = $\$15,000 \times 35\%$ $\newline$ Tax savings from depreciation = $\$5,250$ $\newline$ After-tax cash flow = Before-tax cash flow - Tax savings from depreciation $\newline$ After-tax cash flow = $\$30,000 - \$5,250$ $\newline$ After-tax cash flow = $\$24,750$
Calculate Average Rate of Return: Calculate the average rate of return. $\newline$ The average rate of return is the after-tax cash flow divided by the average investment. $\newline$ Average Rate of Return = $(\text{After-tax cash flow} / \text{Average Investment}) \times 100\%$ $\newline$ Average Rate of Return = $\$\$24,750 / \$37,000$ \times $100$ \%\) $\newline$ Average Rate of Return = $0.669 \times 100\%$ $\newline$ Average Rate of Return = $66$ . $9$ \%

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