Question

The following data are accumulated by McDermott Motors Inc. evaluating two competing capital investment proposals:

	Testing Equipment	Diagnostic Software
Amount of investment	$300,000	$150,000
Useful life	8 years	5 years
Estimated residual value	$40,000	$5,000
Estimated total income over the useful life	$244,800	$85,250

Determine the expected average rate of return for each proposal.

Testing Equipment	%
Diagnostic Software	%

Answer 1

Average Rate of return=(Total Net Profit/useful life)/Intial Cost *100

Testing equiptment=$(2,44,800/8)*100/$30,00,000

=(30,600*100)/3,00,000

=10.2%

Average Rate of return=(Total Net Profit/useful life)/Intial Cost *100

Diagnostic Software=$(85,250/5)*100/$1,50,000

=(17050*100)/1,50000

=11.37%