Calculate the Rate of Return for Investing in Well vs Purchasing Water
How can a town calculate the rate of return for investing in a well versus purchasing water from an aqueduct?
Given the town spent $42,087 on purchasing water from an aqueduct last year, what would be the rate of return if they spent $378,393 to dig a well that lasts indefinitely?
Rate of Return Calculation:
To calculate the rate of return for investing in a well versus purchasing water, we need to compare the town's annual expenses on the aqueduct with the initial investment in the well.
When a town spends money on purchasing water from an aqueduct, it incurs a recurring cost each year. On the other hand, investing in a well involves a one-time upfront cost with long-term benefits.
In this case, the town spent $42,087 annually on water from the aqueduct. If they choose to invest $378,393 in digging a well that lasts indefinitely, they can save the annual expense on purchasing water.
The rate of return can be calculated by dividing the annual cost savings from not purchasing water by the initial investment in the well:
Rate of Return = Annual Savings / Initial Investment
By plugging in the values, we would have:
Rate of Return = $42,087 / $378,393 = 0.111 or 11.1%
This means that the town's investment in the well is expected to yield a nominal return of 11.1% per year, indefinitely, from the money saved on not purchasing water from the aqueduct.