Final answer:
The unadjusted rate of return for the additional shuttle van that Kokomo Shuttle Service, Inc. is considering purchasing is calculated by dividing the annual increase in net income ($6,750) by the average investment cost ($22,500), resulting in a rate of return of 30%.
Step-by-step explanation:
To determine the unadjusted rate of return based on the average cost of the investment for Kokomo Shuttle Service, Inc.'s potential purchase of an additional shuttle van, we calculate as follows:
The van costs $45,000 and would increase net income by $6,750 per year. As the effective life of the van is estimated to be five years, and it will have zero salvage value, we can calculate the average investment cost by taking the initial cost plus the salvage value (which is zero), divided by two, thus the average investment cost is $45,000 / 2 = $22,500. The unadjusted rate of return would then be the annual increase in net income divided by the average investment cost, resulting in $6,750 / $22,500 = 0.3 or 30%.
It's important to note that the unadjusted rate of return does not take into account the time value of money or other potential factors such as taxes, maintenance costs, or changes in operating costs.