Swift Oil Company is considering investing in a new oil well

Swift Oil Company is considering investing in a new oil well. It is expected that the oil well will increase annual revenues by $140,000 and will increase annual expenses by $88,000 including depreciation. The oil well will cost $465,000 and will have a $10,000 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.)

Solution

Expected annual income = $140,000 – $88,000 = $52,000

Average investment = ($465,000 + $10,000) / 2 = $237,500

Annual rate of return = $52,000 / $237,500 = 21.89%