A contractor owns equipment worth $850,000 with annual depreciation of $95,000, insurance of $18,000, and maintenance of $32,000. The equipment generates $180,000 annual revenue. What is the annual net return on investment?
Correct Answer
C) 4.1%
Annual costs: $95,000 + $18,000 + $32,000 = $145,000. Net income: $180,000 - $145,000 = $35,000. ROI = $35,000 ÷ $850,000 = 4.1%. This helps evaluate whether equipment ownership is financially justified.
Why This Is the Correct Answer
The correct answer is A (4.1%) because ROI is calculated by dividing net income by the initial investment. First, we calculate total annual costs ($95,000 + $18,000 + $32,000 = $145,000), then subtract from revenue to get net income ($180,000 - $145,000 = $35,000). Finally, we divide net income by equipment value ($35,000 ÷ $850,000 = 0.041 = 4.1%).
Why the Other Options Are Wrong
Option A: 21.2%
This percentage (6.2%) would result from an incorrect calculation, possibly by omitting one of the cost components or using gross revenue instead of net income in the ROI formula.
Option B: 6.2%
This percentage (8.8%) likely results from dividing only the maintenance costs by a portion of the equipment value, or from incorrectly calculating the net income portion of the formula.
Memory Technique
Use 'DIME' for equipment costs: Depreciation, Insurance, Maintenance, then subtract from Earnings. ROI = (Earnings - DIME costs) ÷ Investment
Reference Hint
Construction Business Management or Financial Management chapter covering Return on Investment (ROI) calculations and equipment cost analysis
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