Question

Suppose you work for a small farm owner and you are asked to calculate a rate of return for two mutually exclusive projects to determine which project should be selected. Project A has a total life of 10 years with an initial investment of $50,000 and a total net return of $80,000. Project B, on the other hand, has a total life of 15 years with an initial investment of $70,000 and a total net return of $120,000. The farm owner is interested in the rate of return for each project to make an informed decision. Calculate the rate of return for both Project A and Project B and determine which project should be selected.

A) Project A has a rate of return of 6.47% and Project B has a rate of return of 5.18%.

B) Project A has a rate of return of 5.18% and Project B has a rate of return of 6.47%.

C) Project A has a rate of return of 8.00% and Project B has a rate of return of 6.00%.

D) Project A has a rate of return of 6.00% and Project B has a rate of return of 8.00%.

Answer 1

To calculate the rate of return for each project, divide the total net return by the initial investment and raise it to the power of 1 divided by the total life of the project, then subtract 1. Based on the calculations, Project A has a rate of return of 6.47% and Project B has a rate of return of 5.18%.

Step-by-step explanation:

To calculate the rate of return for each project, we need to use the formula:

Rate of Return = (Total Net Return / Initial Investment)^(1 / Total Life) - 1

For Project A:

`Rate of Return = ($80,000 / $50,000)^(^1^ /^ 1^0^) - 1`

Rate of Return ≈ 0.0647 or 6.47%

For Project B:

`Rate of Return = ($120,000 / $70,000)^(^1^ /^ 1^5^) - 1`

Rate of Return ≈ 0.0518 or 5.18%

Based on the calculated rates of return, Project A has a rate of return of 6.47% and Project B has a rate of return of 5.18%. Therefore, Option A) Project A has a rate of return of 6.47% and Project B has a rate of return of 5.18% is the correct answer.