Question

Average Rate of Return The following data are accumulated by Watershed Inc. in evaluating two competing...

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 %

Homework Answers

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
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