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We can solve

this problem by first calculating the annual net cash inflow. This can be

solved by remembering that:

Payback period

= Initial investment / Annual net

cash inflow

6 years = $75,000

/ Annual net

cash inflow

Therefore,

Annual net

cash inflow = $12,500

Next, we

calculate for the cost. The cost we will consider here is the depreciation

value of the machine.

Annual depreciation

= $75,000 / 15 years = $5,000

Therefore the annual net operating income is:

Annual net operating income = $12,500 – $5,000 = $7,500

Simple rate of

return is calculated by:

Simple rate of

return = Annual net operating income / Initial

investment

**Simple rate of
return = $7,500 / **

**$75,000 = 0.1 = 10%**

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