Final answer:
The expected average rate of return for a proposed investment of $4,980,000, after accounting for straight-line depreciation over a 20-year period with no residual value, is 10.00% when rounded to two decimal places.
Step-by-step explanation:
To calculate the expected average rate of return for a proposed investment of $4,980,000, we need to consider both the total income expected from the investment and the depreciation of the asset over its useful life.
Using straight-line depreciation, the annual depreciation expense would be the initial investment ($4,980,000) divided by the useful life of the asset (20 years), resulting in an annual depreciation of $249,000.
Over 20 years, the expected total income is given as $14,940,000. To find the average annual income, we divide this amount by 20, which equals $747,000. The expected average rate of return is then calculated by taking the average annual income, subtracting the annual depreciation, and then dividing by the initial investment:
Average annual income = $14,940,000 / 20 years = $747,000
Average rate of return = (($747,000 - $249,000) / $4,980,000) * 100
The calculation gives:
Average rate of return = (($747,000 - $249,000) / $4,980,000) * 100 = 10%
We round this figure to two decimal places, resulting in a 10.00% expected average rate of return on the proposed investment over the 20-year period.