Watertown Paper Corporation is considering adding another machine for the manufacture of corrugated cardboard. The machine would cost $900,000. It would have an estimated life of 6 years and no salvage value. The company estimates that annual revenue would increase by $400,000 and that annual expenses excluding depreciation would increase by $190,000. It uses the straight-line method to compute depreciation expense. Management has a required rate of return of 9%. Compute the annual rate of return.
Expected annual net income = Annual revenues – Annual expenses (including depreciation expense).
Annual rate of return = Expected annual net income/Average investment.
Average investment = (Original investment + Value at end of useful life)/2.