Answer:
The average rate of return on investment using:
+ Straight line method: 23.58%
+ Net present value: 17.85%
Explanation:
* The average rate of return on investment using straight line method:
We have Average rate of return = Average net profit/ Average investment
with average net profit = (90,000 + 80,000 + 40,000 + 30,000 + 240,000)/5 = $96,000
average investment: (investment at the beginning + investment of the end) /2 = 814,400/2 = 407,200
=> Average rate of return = 96,000 / 407,200 = 23.58%
* The average rate of return on investment using net present value:
The average rate of return is the internal rate of return on the project which is the rate that brings the net present value to zero.
Denote the rate as x => (1+x)^(-t) is the discount rate of year t. Denote 1+x as a, we have:
-814,400 + 210,000/a + 200,000/a^2 + 160,000/a^3 + 150,000/a^4 + 720,000/a^5 = 0 <=> a = 1.1785
=> x = 17.85%
