Question

The following data are accumulated by Lone Peak Inc. in evaluating two competing capital investment proposals: 3D Printer Truck Amount of investment $40,000 $50,000 Useful life 7 years 10 years Estimated residual value $3,000 $6,000 Estimated total income over the useful life $24,080 $36,400 Determine the expected average rate of return for each proposal. If required, round to the nearest whole percent. 3D Printer fill in the blank 1 % Truck fill in the blank 2 %

Answer 1

Answer and Explanation:

The computation of the expected average rate of return is shown below:

As we know that

The average rate of return is

= Average net income ÷ average investment

where

Average net income = total income ÷ estimated life

And, the average investment = initial value + estimated residual value ÷ 2

So for 3D printer the average rate of return is

= ($24,080 ÷ 7) ÷ ($40,000 + $3,000) ÷ 2

= $3,440 ÷ $21,500

= 16%

And, for Truck

= ($36,400 ÷ 10 years) ÷ ($50,000 + $6,000) ÷ 2

= $3,640 ÷$28,000

= 13%