Question

The expected average rate of return for a proposed investment of $5,330,000 in a fixed asset, using straight-line depreciation, with a useful life of 20 years, no residual value, and an expected total net income of $15,990,000 over the 20 years is (round to two decimal points). a.1.50% b.15.00% c.60.00% d.30.00%

Answer 1

The Expected Average Rate of Return for the proposed investment is 30%.

Step-by-step explanation:

This can be calculated as follows:

Average Investment = (Initial Cost + Residual Value) / 2 = ($5,330,000 + $0) / 2 = $2,665,000

Expected average annual income = Expected total net income / Useful life = $15,990,000 / 20 = $799,500

Expected Average Rate of Return = Estimated Average Annual Income / Average Investment = $799,500 / $2,665,000 = 0.30, or 30%