Jimba's, Inc., has purchased a new donut maker. It cost $20,000 and has an estimated life of 10 years. The following annual donut sales and expenses are projected: Sales $30,000 Expenses: Flour, etc., required in making donuts $15,000 Salaries 8,000 Depreciation 2,000 25,000 Net operating income $5,000 Assume cash flows occur uniformly throughout a year except for the initial investment. The simple rate of return on the new machine is closest to:

The simple accounting rate of return is the average annual income expressed as a percentage of the investment. The simple rate of return can be calculated using either of the two formula below:

Simple rate of return = Annual operating income/Average investment

Simple rate of return = annual operating income /Initial cost

Using the second formula, the simple rate rate of return would be

Rate of return = ( 5000/20,000) × 100

= 25%