{"id":217794,"date":"2025-05-22T13:38:12","date_gmt":"2025-05-22T13:38:12","guid":{"rendered":"https:\/\/learnexams.com\/blog\/?p=217794"},"modified":"2025-05-22T13:38:15","modified_gmt":"2025-05-22T13:38:15","slug":"blossom-oil-company-is-considering-investing-in-a-new-oil-well","status":"publish","type":"post","link":"https:\/\/www.learnexams.com\/blog\/2025\/05\/22\/blossom-oil-company-is-considering-investing-in-a-new-oil-well\/","title":{"rendered":"Blossom Oil Company is considering investing in a new oil well"},"content":{"rendered":"\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

Correct Answer: 15%<\/strong><\/h3>\n\n\n\n
\n\n\n\n

Explanation:<\/strong><\/h3>\n\n\n\n

To calculate the Annual Rate of Return (ARR)<\/strong>, we use the following formula:<\/p>\n\n\n\n

$$
\\text{Annual Rate of Return (ARR)} = \\left( \\frac{\\text{Average Annual Accounting Income}}{\\text{Initial Investment}} \\right) \\times 100
$$<\/p>\n\n\n\n

\n\n\n\n

Step 1: Determine the Average Annual Accounting Income<\/strong><\/h3>\n\n\n\n

Annual Revenue Increase<\/strong>: \\$136,250
Annual Expense Increase (including depreciation)<\/strong>: \\$74,000<\/p>\n\n\n\n

$$
\\text{Net Annual Income} = 136,250 – 74,000 = 62,250
$$<\/p>\n\n\n\n

This is the annual accounting income<\/strong>, which already includes depreciation. So we don’t need to make any additional adjustments for depreciation here.<\/p>\n\n\n\n

\n\n\n\n

Step 2: Calculate the Initial Investment<\/strong><\/h3>\n\n\n\n

The cost of the oil well is \\$404,000.<\/p>\n\n\n\n

Even though the oil well has a salvage value<\/strong> of \\$11,000, this is used when computing depreciation and does not impact the ARR directly<\/strong>, because ARR is based on the initial investment<\/strong>, not net investment.<\/p>\n\n\n\n

$$
\\text{Initial Investment} = 404,000
$$<\/p>\n\n\n\n

\n\n\n\n

Step 3: Plug into the ARR Formula<\/strong><\/h3>\n\n\n\n

$$
\\text{ARR} = \\left( \\frac{62,250}{404,000} \\right) \\times 100 = 15.4\\%
$$<\/p>\n\n\n\n

Rounded to 0 decimal places<\/strong>, the Annual Rate of Return = 15%<\/strong><\/p>\n\n\n\n

\n\n\n\n

Understanding the Concept:<\/strong><\/h3>\n\n\n\n

The Annual Rate of Return<\/strong> (ARR) is a simple method of evaluating investments that tells a company how much net income it will generate annually relative to how much it initially invested.<\/p>\n\n\n\n

ARR is useful for basic comparisons between different projects<\/strong>, especially when management needs a quick estimate of profitability. However, it does not consider the time value of money<\/strong>, unlike methods like Net Present Value (NPV)<\/strong> or Internal Rate of Return (IRR)<\/strong>. For long-term investments or those with variable cash flows, more advanced techniques are often preferred.<\/p>\n\n\n\n

In this case, Blossom Oil Company sees a return of 15 cents for every dollar invested each year, making it a potentially attractive investment depending on the company\u2019s required rate of return.<\/p>\n\n\n\n

\"\"<\/figure>\n","protected":false},"excerpt":{"rendered":"

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 […]<\/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-217794","post","type-post","status-publish","format-standard","hentry","category-exams-certification"],"_links":{"self":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/posts\/217794","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=217794"}],"version-history":[{"count":0,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/posts\/217794\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/media?parent=217794"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/categories?post=217794"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/tags?post=217794"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}