Final answer:
The unadjusted rate of return for the new spray paint machine, which costs $4,800 and is expected to save $720 per year, is 30% over its 15-year life.
Step-by-step explanation:
The question is asking to determine the unadjusted rate of return of a new spray paint machine based on its average cost of investment. The cost of the machine is $4,800, and it is expected to increase net income by $720 per year over its effective life of 15 years. To calculate the unadjusted rate of return, we use the following formula:
Unadjusted Rate of Return = (Annual Increase in Net Income) / (Average Investment Cost) * 100%
The average investment cost is usually calculated by taking the sum of the initial cost of the asset plus the value of the asset at the end of its useful life (which is often zero if fully depreciated), and then dividing by 2. However, since the question does not provide a residual value, we will assume it is zero:
Average Investment Cost = (Initial Cost + Residual Value) / 2 = ($4,800 + $0) / 2 = $2,400
Substituting the values into the formula:
Unadjusted Rate of Return = ($720 / $2,400) * 100% = 30%
Thus, the unadjusted rate of return based on the average cost of the investment for the new machine is 30%.