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The expected average rate of return for a proposed investment of $6,850,000 in a fixed asset,...

The expected average rate of return for a proposed investment of $6,850,000 in a fixed asset, using straight-line depreciation, a useful life of 20 years, no residual value, and an expected total income of $13,700,000 over the 20 years, is (round to two decimal places)

a.20.00%

b.10.00%

c.1.00%

d.40.00%

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Answer #1

Ans:

Average rate of Return = Average Income Per Year / Average Investment

Average Income Per Year = $13,700,000 / 20 = $685,000

Average Investment = (Asset Value + Salvage Value) / 2 = ($6,850,000 + $0) / 2 = $3,425,000

Average rate of Return = $685,000 / $3,425,000 = 20%

So correct answer is Option B.

*Please note that some firm also calculate Average rate of return based on initial investment, in such case ARR will be 10%.

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