A division is considering investing in capital equipment costing $2·7m. The useful economic life of the equipment is
expected to be 50 years, with no resale value at the end of the period. The forecast return on the initial investment
is 15% per annum before depreciation. The division’s cost of capital is 7%.
What is the expected annual residual income of the initial investment?
A $0
B ($270,000)
C $162,000
D $216,000
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i think the answer is D, but i do not have its answer. Could you please confirm my answer sir?
5y ago#2The answer is C. I think maybe you forgot to subtract depreciation from the annual return.
sir if we are deducting depreciation from profit then why not deduct deprn from 2.7$ of investment also(basically why not use NBV)?
5y ago#4The question gives the return before depreciation. The profit we use is always after depreciation.
The question specifically says to calculate the RI on the initial investment.
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