{"id":219481,"date":"2025-05-26T08:23:13","date_gmt":"2025-05-26T08:23:13","guid":{"rendered":"https:\/\/learnexams.com\/blog\/?p=219481"},"modified":"2025-05-26T08:23:15","modified_gmt":"2025-05-26T08:23:15","slug":"it-is-expected-that-the-oil-well-will-increase-annual-revenues-by-136250-and-will-increase-annual-expenses-by-74000-including-depreciation","status":"publish","type":"post","link":"https:\/\/www.learnexams.com\/blog\/2025\/05\/26\/it-is-expected-that-the-oil-well-will-increase-annual-revenues-by-136250-and-will-increase-annual-expenses-by-74000-including-depreciation\/","title":{"rendered":"It is expected that the oil well will increase annual revenues by $136,250 and will increase annual expenses by $74,000 including depreciation."},"content":{"rendered":"\n<p>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<p>Annual rate of return %<\/p>\n\n\n\n<p>eTextbook and Media Attempts: 0 of 3 used<\/p>\n\n\n\n<p><strong><mark style=\"background-color:rgba(0, 0, 0, 0)\" class=\"has-inline-color has-ast-global-color-0-color\">The Correct Answer and Explanation is:<\/mark><\/strong><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>Annual Rate of Return Calculation<\/strong><\/h3>\n\n\n\n<p>To calculate the <strong>Annual Rate of Return (ARR)<\/strong>, we use the following formula: Annual&nbsp;Rate&nbsp;of&nbsp;Return&nbsp;(ARR)=(Average&nbsp;Annual&nbsp;Accounting&nbsp;IncomeInitial&nbsp;Investment)\u00d7100\\text{Annual Rate of Return (ARR)} = \\left( \\frac{\\text{Average Annual Accounting Income}}{\\text{Initial Investment}} \\right) \\times 100<\/p>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>Step 1: Calculate Annual Accounting Income<\/strong><\/h3>\n\n\n\n<p>Annual&nbsp;Accounting&nbsp;Income=Annual&nbsp;Revenue\u2212Annual&nbsp;Expenses\\text{Annual Accounting Income} = \\text{Annual Revenue} &#8211; \\text{Annual Expenses} =136,250\u221274,000=62,250= 136,250 &#8211; 74,000 = 62,250<\/p>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>Step 2: Determine the Initial Investment<\/strong><\/h3>\n\n\n\n<p>Initial&nbsp;Investment=404,000\\text{Initial Investment} = 404,000<\/p>\n\n\n\n<p>Note: We use the initial investment amount <em>without<\/em> subtracting the salvage value.<\/p>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>Step 3: Calculate ARR<\/strong><\/h3>\n\n\n\n<p>ARR=(62,250404,000)\u00d7100\u224815.4%\\text{ARR} = \\left( \\frac{62,250}{404,000} \\right) \\times 100 \\approx 15.4\\%<\/p>\n\n\n\n<p>Rounding to <strong>0 decimal places<\/strong>, as instructed: 15%\\boxed{15\\%}<\/p>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>Explanation<\/strong><\/h3>\n\n\n\n<p>The Annual Rate of Return (ARR) is a widely used metric in capital budgeting that helps evaluate the profitability of an investment. It represents the expected return on an investment expressed as a percentage of the initial cost. In this case, Blossom Oil Company is assessing the feasibility of investing in a new oil well.<\/p>\n\n\n\n<p>First, the project is expected to generate an increase in annual revenue of $136,250. However, it will also lead to higher annual expenses of $74,000, which includes depreciation. Subtracting the expenses from the revenues gives us the annual accounting income, which is $62,250.<\/p>\n\n\n\n<p>The ARR formula compares this average annual accounting income to the total cost of the investment. Blossom Oil plans to invest $404,000 in the new oil well. Although the well will have a salvage value of $11,000 at the end of its 10-year life, this value is not used in the ARR calculation because ARR focuses on accounting income, not cash flows or net present value.<\/p>\n\n\n\n<p>By dividing the annual income of $62,250 by the initial investment of $404,000 and multiplying by 100, we calculate an ARR of approximately 15.4%. When rounded to the nearest whole number, this results in an annual rate of return of <strong>15%<\/strong>.<\/p>\n\n\n\n<p>This percentage can be used by Blossom Oil Company to compare this investment opportunity to others or to a required rate of return set by company policy. If 15% exceeds their target return, the investment may be considered favorable.<\/p>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<p><strong>Final Answer: 15%\\boxed{15\\%}<\/strong><\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img decoding=\"async\" src=\"https:\/\/learnexams.com\/blog\/wp-content\/uploads\/2025\/05\/learnexams-banner5-20.jpeg\" alt=\"\" class=\"wp-image-219482\"\/><\/figure>\n","protected":false},"excerpt":{"rendered":"<p>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 [&hellip;]<\/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-219481","post","type-post","status-publish","format-standard","hentry","category-exams-certification"],"_links":{"self":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/posts\/219481","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=219481"}],"version-history":[{"count":0,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/posts\/219481\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/media?parent=219481"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/categories?post=219481"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/tags?post=219481"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}