Question

The expected average rate of return for a proposed investment of $5,470,000 in a fixed asset, using straight-line depreciation, with a useful life of 20 years, no residual value, and an expected total net income of $16,410,000 over the 20 years is (round to two decimal points). a. 60.00% b. 15.00% c. 1.50% d. 30.00%

Answer 1

The correct answer here is D) 30%

Step-by-step explanation:

FORMULA TO BE USED =

Average net income each year / Average asset value

where,

Average net income each year =

Total net income / Number of years

= $16,410,000 / 20

= $820,500

Average asset value =

Total value of asset + salvage value / 2

= $5470,000 / 2

= $2735,000

putting these values in the formula ,

= $820,500 / $2735,000

= .3 ( multiplying by 100 to make it in percentage )

= .3 x 100

= 30%

Answer 2

The correct option is c i.e 1.50%

Step-by-step explanation:

Average rate of return :

The average rate of return is that return which shows a relationship between the net income and initial investment. For calculating the average rate of return the amount should be multiply by 2 so that average can be arrived.

The formula for average rate of return is equals to

= Net income ÷ Average investment

The steps for computing average rate of return is shown below:

Step 1 : Calculation of Net income for each year.

Step 2 : Computation of depreciation by applying average investment.

Step 3 : By applying above two steps, the answer is come.

Mathematically,

Step 1 : Calculation of Net income for each year which equals to :

= Net income ÷ total number of years

= $16,410,000 ÷ 20 years

= $820,500

Thus, the net income for each year is $820,500

Step 2 : Computation of depreciation by applying average investment which is shown below:

= ( Investment - Residual value ) ÷ useful life × 2

= ($5,470,000 - 0) ÷ 20 × 2

= $547,000

Now, apply the average rate of return formula which is equals to

= Net income ÷ Average investment

= $820,500 ÷ $547,000

= 1.50%

Thus, the correct option is c i.e 1.50%