Pierre’s Hair Salon is considering opening a new location in French Lick, Califo

Question

Pierre’s Hair Salon is considering opening a new location in French Lick, California. The cost of building a new salon is $306,200. A new salon will normally generate annual revenues of $63,760, with annual expenses (including depreciation) of $40,900. At the end of 15 years the salon will have a salvage value of $74,800.

Calculate the annual rate of return on the project.

Pierre's Hair Salon is considering opening a new location in French Lick, California. The cost of building a new salon is $306,200. A new salon will normally generate annual revenues of $63,760, with annual expenses (including depreciation) of $40,900. At the end of 15 years the salon will have a salvage value of $74,800. Calculate the annual rate of return on the project. (Round answer to 0 decimal places, e.g. 125.) Annual rate of return 0 0

Explanation / Answer

Answer

$63,760 - 40,900 = 22,860

The formula of the average investment: (Investment + Salvage Value) /2

($306,200 + 74,800) / 2 = $190,500

Income / average investment = annual rate of return

Annual rate of return is
22,560/190,500 = 12%

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