Question

The expected average rate of return for a proposed investment of $4,680,000 in a fixed asset, using straight-line depreciation, a useful life of 20 years, no residual value, and an expected total income of $14,040,000 over the 20 years, is (round to two decimal places)

Answer 1

The expected average rate of return for the investment is 10.02%, calculated by subtracting the initial investment from total income, then dividing by the investment's life to get the annual profit, and finally dividing that by the initial investment.

Step-by-step explanation:

The question involves calculating the expected average rate of return for an investment. Given that the initial investment is $4,680,000, the straight-line depreciation over 20 years with no residual value, and the total expected income over this period is $14,040,000, the expected average rate of return can be calculated using these figures. The investment produces a total income, and the depreciation is simply the initial investment divided by its useful life, which in this case is $4,680,000 / 20. This does not directly impact the rate of return but is a measure of the expense of the asset over its useful life.

The formula for average rate of return is:

Expected Annual Profit / Initial Investment

where the expected annual profit is the total income minus the investment, divided by the life of the investment. Given this, the expected average annual profit is:

($14,040,000 - $4,680,000) / 20 = $469,000

Thus, the expected average rate of return is:

$469,000 / $4,680,000 = 0.10021 or 10.02% when rounded to two decimal places.