Question

Determine the average rate of return for a project that is estimated to yield total income of $191,520 over 4 years, costs $415,000, and has a $41,000 residual value.

Answer 1

To calculate the average rate of return for the project, the net gain or loss is determined by subtracting the initial cost from the combined total income and residual value, and then dividing by the initial cost, resulting in an average annual rate of return of approximately -11%.

Step-by-step explanation:

To determine the average rate of return for a project, follow these steps:

• Calculate total income: The total income over 4 years is stated to be $191,520.
• Subtract initial cost: The project costs $415,000 initially.
• Add residual value: At the end of the project, there is a $41,000 residual value.
• Combine the total income with the residual value, then subtract the initial cost to find net gain or loss: $191,520 + $41,000 - $415,000 = -$182,480.
• Next, divide the net gain or loss by the initial cost to find the rate of return: -$182,480 / $415,000 = -0.4397, or -43.97% over 4 years.
• Finally, to find the average annual rate of return, divide by the number of years: -43.97% / 4 = -10.9925%, or approximately -11% per year.

In conclusion, the project is expected to yield an average annual rate of return of approximately -11%.