Question

The following data are accumulated by Watershed Inc. in evaluating two competing capital investment proposals: Project A Project Z Amount of investment $55,000 $50,000 Useful life 12 years 15 years Estimated residual value $5,000 $6,000 Estimated total income over the useful life $57,600 $63,000 Determine the expected average rate of return for each project.

Answer 1

To determine the expected average rate of return for each project, subtract the residual value from the estimated total income, divide by the investment amount, and divide by the useful life of the project. Project A's expected average rate of return is 7.97% and Project Z's is 7.6%.

Step-by-step explanation:

The expected average rate of return for each project is calculated by dividing the estimated total income over the useful life of the investment, minus the residual value, by the amount of the original investment. Then, that result is divided by the useful life of the project to determine the average annual return, which is then expressed as a percentage of the original investment.

For Project A, the calculation would be (($57,600 - $5,000) / $55,000) / 12 years = ([$52,600 / $55,000] / 12) ≈ 0.0797 or 7.97% average annual rate of return.

For Project Z, the calculation would be (($63,000 - $6,000) / $50,000) / 15 years = ([$57,000 / $50,000] / 15) ≈ 0.076 or 7.6% average annual rate of return.

Answer 2

Project Average rate of return

A 16%

Z 15%

Step-by-step explanation:

The average rate of return (ARR) is the proportion of the average investment that is earned as profit.

Average rate of return(ARR) = average operating income/ Average investment

Project A=

Average income = 57,600/12 = 4800

Average investment = (55,000 + 5,000)/2 = 30000

ARR = 4,800/30,000 × 100 = 16%

Projecr Z

Average income = 63,000/15= 4200

Aveage investment = (50,000 + 6,000)/2= 28,000

ARR = 4,200/28,000× 100 = 15%