Question

The expected average rate of return for a proposed investment of $5,910,000 in a fixed asset, using straight-line depreciation, with a useful life of 20 years, no residual value, and an expected total net income of $17,730,000 over the 20 years is:________ (round to two decimal points).
a. 30.00%
b. 60.00%
c. 1.50%
d. 15.00%

Answer 1

Answer:

Option A, 30.00%, is the correct answer.

Explanation:

The investment amount = $5910000

Useful life = 20 years

Residual value = 0

Expected net income = $17730000

Use the below formula to find the average rate of return by using the given values.

The average rate of return = Average Annual Net Income / Average investment

Now insert all the given values in the formula in order to compute the average rate of return.

[ ( 17730000 / 20 ) / ( 5910000 / 2 ) ] * 100

[ 886500 / 2955000 ] * 100 =30 %