Question

g Nguyen Company has an opportunity to purchase an asset that will cost the company $36,000. The asset is expected to add $12,000 per year to the company's net income. Assuming the asset has a five-year useful life and zero salvage value, the unadjusted rate of return (based on average investment) will be:

Answer 1

66.67%

Step-by-step explanation:

Average investment = Initial investment/ Useful life = 36,000/ 5,000 = $7,200

The annual depreciation of the asset can be calculated as:

+) Annual depreciation = (Initial cost - Salvage value)/ Useful life

= ($36,000 - 0)/ 5 = $7,200

Annual net income from the asset is $12,000

+) Annual accounting income = Annual net income - Annual depreciation

= $12,000 - $7,200 = $4,800

The unadjusted rate of return on the asset can be calculated as following:

+) Unadjusted rate of return = Annual accounting income/ Average investment × 100%

=
`(4,800)/(7,200)`× 100% = 66.67%