Final answer:
The percentage that represents a reasonable return on an investment, serving as a basis to determine the investment's value based on net income, is the expected rate of return. It includes the consideration of the opportunity cost and a risk premium to attract investors.
Step-by-step explanation:
The percentage that is considered a reasonable return on an investment and used to estimate value based on net income is known as the expected rate of return. This rate is what an investor would typically require to make the investment attractive compared to other opportunities, factoring in the opportunity cost of capital and potential risks. Deciding on the appropriate rate includes recognizing the risk premium, which compensates for investments that appear riskier than the general market. For instance, if an investor determines that the ideal interest rate to appraise future payments from an investment should be 15%, this calculation will reflect not just the going rate of return on similar investments but also a risk-adjusted premium.Risks associated with investments include default risk, where there is a danger that the borrower may fail to repay, and interest rate risk, where market rates might rise after a bond is purchased, leading to missed opportunities for higher returns. The expected rate of return is projected over a period and expressed as a percentage. A high-risk investment might lead to returns significantly above or below the expected rate of return, depending on actual outcomes, whereas a low-risk investment is likely to have stable, predictable returns close to the expected rate.