Question

Average Rate of Return

The following data are accumulated by Watershed Inc. in evaluating two competing capital investment proposals:

	Project A		Project Z
Amount of investment	$52,000			$52,000
Useful life	4 years			5 years
Estimated residual value	0			0
Estimated total income over the useful life	$7,800			$13,000

Determine the expected average rate of return for each project. Round your answers to one decimal place.

Project A	%
Project Z	%

Answer 1

Ans.	Average rate of return =   Average net income / Average investment * 100
	Project A	$1,950 / $26,000 * 100	7.50%
	Project Z	$2,600 / $26,000 * 100	10.00%
	*CALCULATIONS:
	*Average net income =   Estimated total income / Useful life
	Project A	$7,800 / 4	$1,950
	Project Z	$13,000 / 5	$2,600
	*Average investment =   (Cost of maching + Salvage value) / 2
	Project A	($52,000 + 0) / 2	$26,000
	Project Z	($52,000 + 0) / 2	$26,000