Question

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1. The following data are accumulated by Eco Labs, Inc. in evaluating two competing capital investment proposals:

   	Testing Equipment		Vehicle
   Amount of investment	$60,000			$92,000
   Useful life	4 years			7 years
   Estimated residual value	0			0
   Estimated total income over the useful life	$9,000			$32,200

   Determine the expected average rate of return for each proposal. If required, round your answers to one decimal place.

   Testing Equipment	%
   Vehicle	%

Answer 1

Average rate of return = Annual net income / Average investment

Testing equipment = (9000/4) / (60,000/2)

= 2250 / 30,000

= 7.5 %

Vehicle = (32,200/7) / (92,000/2)

= 4600 / 46,000

= 10%

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