Answer:
The correct option is c i.e 1.50%
Explanation:
Average rate of return :
The average rate of return is that return which shows a relationship between the net income and initial investment. For calculating the average rate of return the amount should be multiply by 2 so that average can be arrived.
The formula for average rate of return is equals to
= Net income ÷ Average investment
The steps for computing average rate of return is shown below:
Step 1 : Calculation of Net income for each year.
Step 2 : Computation of depreciation by applying average investment.
Step 3 : By applying above two steps, the answer is come.
Mathematically,
Step 1 : Calculation of Net income for each year which equals to :
= Net income ÷ total number of years
= $16,410,000 ÷ 20 years
= $820,500
Thus, the net income for each year is $820,500
Step 2 : Computation of depreciation by applying average investment which is shown below:
= ( Investment - Residual value ) ÷ useful life × 2
= ($5,470,000 - 0) ÷ 20 × 2
= $547,000
Now, apply the average rate of return formula which is equals to
= Net income ÷ Average investment
= $820,500 ÷ $547,000
= 1.50%
Thus, the correct option is c i.e 1.50%
