Asked by Sabrina Laricy on Jun 30, 2024
Verified
The anticipated purchase of a fixed asset for $400,000, with a useful life of five years and no residual value, is expected to yield total net income of $200,000 for the five years. The expected average rate of return on investment is 50%.
Fixed Asset
Long-term tangible property that a firm owns and uses in its operations to generate income, not expected to be consumed or converted into cash in the short term.
Useful Life
An estimate of the lifespan of an asset during which it is expected to remain productive or useful for the purposes it was acquired.
Residual Value
The estimated value that an asset is expected to have at the end of its useful life, after depreciation has been taken into account.
- Compute the anticipated average yield on proposed investments.
Verified Answer
In this case, the calculation would be ($200,000 / $400,000) x 100%, which equals 50%. Therefore, the statement regarding the expected average rate of return on investment is true. However, a rate of return of 50% is highly unrealistic and should raise suspicions about the accuracy of the information provided.
Learning Objectives
- Compute the anticipated average yield on proposed investments.
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