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Pierre’s Hair Salon is considering opening a new location in French Lick, California. The cost of building a new salon is $280,000. A new salon will normally generate annual revenues of $67,320, with annual expenses (including depreciation) of $38,600. At the end of 15 years the salon will have a salvage value of $79,000.Calculate the annual rate of return on the project.

Respuesta :

Answer:

16%

Explanation:

Given: Cost of building new salon is $280000.

           Annual revenue is $67320.

           Annual expenses is $38600.

           salvage value is $79000.

First, lets calculate Annual income.

Annual income= [tex]Revenue-expense[/tex]

Annual income= [tex]67320-38600= \$ 28720[/tex]

Now, calculating the average investment.

Average investment= [tex]\frac{(Investment + salvage value}{2}[/tex]

Average investment= [tex]\frac{(280000+79000)}{2} = \frac{359000}{2}[/tex]

∴ Average investment= [tex]\$ 179500[/tex]

Annual rate of return= [tex]\frac{Annual\ income}{Average\ investment} \times 100[/tex]

Annual rate of return= [tex]\frac{28720}{179500} \times 100 = 16\%[/tex]

∴Annual rate of return on the project is 16%.

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