Question

Dickerson Co. is evaluating a project requiring a capital expenditure of $810,000. The project has an estimated life of 4 years and no salvage value. The estimated net income and net cash flow from the project are as follows: Year Net Income Net Cash Flow 1 $75,000 $285,000 2 100,000 290,000 3 109,000 190,000 4 36,000 125,000 $320,000 $890,000 The company's minimum desired rate of return is 12%. The present value of $1 at compound interest of 12% for 1, 2, 3, and 4 years is 0.893, 0.797, 0.712, and 0.636, respectively. Required: Determine the average rate of return on investment, including the effect of depreciation on the investment. Round your answer to one decimal place. %

Answer 1

Answer:

The average rate of return on investment is 19.8%

Explanation:

According to the given data we have the following:

Initial Investment = $810,000

Salvage Value = $0

Henc, Average Investment = (Initial Investment + Salvage Value) / 2

Average Investment = ($810,000 + $0) / 2

Average Investment = $405,000

Average Net Income = ($75,000 + $100,000 + $109,000 + $36,000) / 4

Average Net Income = $320,000 / 4

Average Net Income = $80,000

Therefore, Average Rate of Return on Investment = Average Net Income / Average Investment

Average Rate of Return on Investment = $80,000 / $405,000

Average Rate of Return on Investment = 19.8%

The average rate of return on investment is 19.8%