The oil well will cost $404,000 and will have a $11,000 salvage value at the end of its 10-year useful life. Calculate the annual rate of return. (Round answer to 0 decimal places, e.g. 13<\/p>\n\n\n\n
Blossom Oil Company is considering investing in a new oil well. It is expected that the oil well will increase annual revenues by $136,250 and will increase annual expenses by $74,000 including depreciation. The oil well will cost $404,000 and will have a $11,000 salvage value at the end of its 10-year useful life. Calculate the annual rate of return. (Round answer to 0 decimal places, e.g. 13%.)<\/p>\n\n\n\n
Annual rate of return %<\/p>\n\n\n\n
eTextbook and Media Attempts: 0 of 3 used<\/p>\n\n\n\n
The Correct Answer and Explanation is:<\/mark><\/strong><\/p>\n\n\n\n To calculate the Annual Rate of Return (ARR)<\/strong> for Blossom Oil Company\u2019s investment, we use the following formula:<\/p>\n\n\n\n $$ The increase in annual revenues<\/strong> is:<\/p>\n\n\n\n $$ The increase in annual expenses<\/strong>, including depreciation, is:<\/p>\n\n\n\n $$ So, the Annual Net Income<\/strong> is:<\/p>\n\n\n\n $$ The initial cost<\/strong> of the oil well is:<\/p>\n\n\n\n $$ Now apply the formula:<\/p>\n\n\n\n $$ $$ Rounded to the nearest whole number:<\/p>\n\n\n\n $$ The Annual Rate of Return (ARR)<\/strong> is a capital budgeting method used to evaluate the profitability of an investment. It expresses the expected annual return as a percentage of the initial investment. This helps management compare the relative attractiveness of different investment opportunities.<\/p>\n\n\n\n In this scenario, Blossom Oil Company is considering a \\$404,000 investment in a new oil well. The oil well is expected to increase revenues by \\$136,250 annually but will also increase operating expenses by \\$74,000. This \\$74,000 includes depreciation, so we do not need to subtract it again separately. The net annual accounting income, therefore, is the difference between the increased revenues and expenses, which is \\$62,250.<\/p>\n\n\n\n Using the ARR formula, we divide this annual income by the initial investment. This gives us a return of approximately 15.4%. Since the question asks us to round to the nearest whole number, the final ARR is 15%<\/strong>.<\/p>\n\n\n\n It’s important to note that the ARR does not account for the time value of money, unlike other investment appraisal methods like Net Present Value (NPV) or Internal Rate of Return (IRR). However, ARR is straightforward and useful for preliminary evaluations. Also, the salvage value (\\$11,000) is not included in the ARR calculation because ARR focuses on average annual accounting income, not total cash flows or terminal values.<\/p>\n\n\n\n By earning a 15% return annually based on accounting income, this investment may be considered favorable depending on the company\u2019s required rate of return or hurdle rate. If the ARR exceeds that benchmark, it suggests the project could be worthwhile.<\/p>\n\n\n\n Annual rate of return: $\\boxed{15\\%}$<\/strong><\/p>\n","protected":false},"excerpt":{"rendered":" The oil well will cost $404,000 and will have a $11,000 salvage value at the end of its 10-year useful life. Calculate the annual rate of return. (Round answer to 0 decimal places, e.g. 13 Blossom Oil Company is considering investing in a new oil well. It is expected that the oil well will increase […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"site-sidebar-layout":"default","site-content-layout":"","ast-site-content-layout":"default","site-content-style":"default","site-sidebar-style":"default","ast-global-header-display":"","ast-banner-title-visibility":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","ast-disable-related-posts":"","theme-transparent-header-meta":"","adv-header-id-meta":"","stick-header-meta":"","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","astra-migrate-meta-layouts":"default","ast-page-background-enabled":"default","ast-page-background-meta":{"desktop":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"ast-content-background-meta":{"desktop":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"footnotes":""},"categories":[25],"tags":[],"class_list":["post-216256","post","type-post","status-publish","format-standard","hentry","category-exams-certification"],"_links":{"self":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/posts\/216256","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/comments?post=216256"}],"version-history":[{"count":0,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/posts\/216256\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/media?parent=216256"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/categories?post=216256"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/tags?post=216256"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}
\\text{Annual Rate of Return} = \\left( \\frac{\\text{Average Annual Accounting Income}}{\\text{Initial Investment}} \\right) \\times 100
$$<\/p>\n\n\n\n
\n\n\n\nStep 1: Calculate Annual Net Income<\/strong><\/h3>\n\n\n\n
\\$136,250
$$<\/p>\n\n\n\n
\\$74,000
$$<\/p>\n\n\n\n
\\$136,250 – \\$74,000 = \\$62,250
$$<\/p>\n\n\n\n
\n\n\n\nStep 2: Calculate the Initial Investment<\/strong><\/h3>\n\n\n\n
\\$404,000
$$<\/p>\n\n\n\n
\n\n\n\nStep 3: Calculate the Annual Rate of Return<\/strong><\/h3>\n\n\n\n
\\text{ARR} = \\left( \\frac{62,250}{404,000} \\right) \\times 100
$$<\/p>\n\n\n\n
\\text{ARR} \\approx 0.1540 \\times 100 = 15.4\\%
$$<\/p>\n\n\n\n
\\boxed{15\\%}
$$<\/p>\n\n\n\n
\n\n\n\n300-Word Explanation:<\/strong><\/h3>\n\n\n\n
\n\n\n\n\u2705 Final Answer:<\/h3>\n\n\n\n