Asked by Katey Dotson on Jul 17, 2024
Verified
The anticipated purchase of a fixed asset for $400,000, with a useful life of 5 years and no residual value, is expected to yield total net income of $300,000 over the 5 years. The expected average rate of return is 37.5%.
Residual Value
The estimated value of a fixed asset at the end of its useful life.
Useful Life
The estimated lifespan of a depreciable asset during which it can be expected to contribute to company operations.
Average Rate of Return
A financial metric used to evaluate the profitability of an investment, calculated as the average annual profit divided by the initial investment cost.
- Master the technique to outline and work out the average rate of return, perceiving its consequentiality.
- Calculate the expected average rate of return for capital investments.
Verified Answer
CG
Catherine GironJul 21, 2024
Final Answer :
False
Explanation :
The expected average rate of return is calculated as (Annual Net Income / Initial Investment) * 100. With a total net income of $300,000 over 5 years, the annual net income is $60,000. Therefore, the expected average rate of return is ($60,000 / $400,000) * 100 = 15%.
Learning Objectives
- Master the technique to outline and work out the average rate of return, perceiving its consequentiality.
- Calculate the expected average rate of return for capital investments.
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