Question

The expected average rate of return for a proposed investment of $5,490,000 in a fixed asset, using straight-line depreciation, a useful life of 20 years, no residual value, and an expected total income of $10,980,000 over the 20 years, is (round to two decimal places)

Answer 1

Answer:

10%

Explanation:

Since there is no residual value, the full amount invested should be used to calculate the average rate of return. The average rate of return is determined as the average income divided by the invested amount.

If the total income was $10,980,000 over 20 years, the average income is:

$I_{avg} =\frac{\ 10,980,000}{20}=\ 549,000$

If the invested amount was $5,490,000, the average rate of return is:

$r_{avg} = \frac{\ 549,000}{\ 5,490,000}=0.10 = 10\%$