Question

Alpha Inc. is evaluating the purchase of a machine costing $350,000. The expected useful life of the machine is 5 years at the end which it would have no residual value, and the depreciation is assumed to be on straight-line basis. The estimated total income from the machine is $500,000. The expected average rate of return for this machine is:_______.

Answer 1

The average expected rate of return = 57%

Step-by-step explanation:

The accounting rate of return is the average annual income expressed as a percentage of the average investment.

The simple rate of return can be calculated using the two formula below:

Accounting rate of return

= Annual operating income/Average investment × 100

Average investment = (Initial cost + scrap value)/2

Average income = Total income over investment period / Number of years

Annual average income = $500,000/5 = $100,000

Average Investment = (350,000 + 0)/2= $175,000

The expected rate of return = (100,000/175,000) × 100 = 57%

The average expected rate of return = 57%