Asked by Emily Feasel on Jun 01, 2024
Verified
The expected average rate of return for a proposed investment of $4,800,000 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 $10,560,000 over the 20 years is
A) 24%
B) 22%
C) 45%
D) 10%
Straight-Line Depreciation
A process of dividing the expense of a substantial asset into identical annual portions over its useful duration.
Net Income
The net income of a firm after deducting all expenses and taxes from its gross revenue.
- Calculate and evaluate the typical rate of return on an investment.
Verified Answer
SS
Sudha SrivastavaJun 04, 2024
Final Answer :
B
Explanation :
The expected average rate of return can be calculated using the following formula:
Average Annual Income / Initial Investment
The average annual income is the total net income divided by the useful life of the asset, which is:
10,560,000 / 20 = 528,000 per year
The initial investment is $4,800,000.
Using these numbers, we can calculate the expected average rate of return:
528,000 / 4,800,000 = 0.11 or 11%
However, this is only the average rate of return for one year. To calculate the average rate of return over the entire useful life of the asset, we need to use the following formula:
[(Total Income - Total Expenses) / Useful Life] / Initial Investment
Since the asset has no residual value, the total expenses are equal to the initial investment. Therefore:
(10,560,000 - 4,800,000) / 20 / 4,800,000 = 0.22 or 22%
Therefore, the best choice is B, with an expected average rate of return of 22%.
Average Annual Income / Initial Investment
The average annual income is the total net income divided by the useful life of the asset, which is:
10,560,000 / 20 = 528,000 per year
The initial investment is $4,800,000.
Using these numbers, we can calculate the expected average rate of return:
528,000 / 4,800,000 = 0.11 or 11%
However, this is only the average rate of return for one year. To calculate the average rate of return over the entire useful life of the asset, we need to use the following formula:
[(Total Income - Total Expenses) / Useful Life] / Initial Investment
Since the asset has no residual value, the total expenses are equal to the initial investment. Therefore:
(10,560,000 - 4,800,000) / 20 / 4,800,000 = 0.22 or 22%
Therefore, the best choice is B, with an expected average rate of return of 22%.
Learning Objectives
- Calculate and evaluate the typical rate of return on an investment.
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