Question

Average Rate of Return

Determine the average rate of return for a project that is estimated to yield total income of $148,500 over five years, has a cost of $300,000, and has a $30,000 residual value.
%

Answer 1

To calculate the average rate of return for the project, add the total income and the residual value, then divide it by the total investment and multiply by 100%. The average rate of return for this project is 59.5%.

Step-by-step explanation:

To calculate the average rate of return for the project, we need to find the total return and the total investment. The total return is the sum of the total income and the residual value, which is $148,500 + $30,000 = $178,500. The total investment is the cost of the project, which is $300,000.

Next, we can use the formula for an average rate of return:

Average Rate of Return = (Total Return / Total Investment) * 100%

Plugging in the values, we get:

Average Rate of Return = ($178,500 / $300,000) * 100% = 59.5%

Answer 2

22%

Step-by-step explanation:

The formula to compute the accounting rate of return is shown below:

= Average net income ÷ average investment

where,

Average net income is

= Total income ÷ number of years

= $148,500 ÷ 5 years

= $29,700

And, the average investment would be

= (Cost - salvage value) ÷ 2

= ($300,000 - $30,000) ÷ 2

= $270,000 ÷ 2

= $135,000

Now put these values to the above formula

So, the rate would equal to

= $29,700 ÷ $135,000

= 22%