Question

Average Rate of Return The following data are accumulated by Watershed Inc. in evaluating two competing capital investment proposals: Project A Project Z Amount of investment $68,000 $92,000 Useful life 4 years 9 years Estimated residual value Estimated total income over the useful life $7,480 $41,400 Determine the expected average rate of return for each project. Round your answers to one decimal place. Project A Project Z

Answer 1

1)

Average income = Estimated total income / useful life

Project A = $7,480 / 4 = $1,870

Project Z = $41,400 / 9 = $4,600

Average investment = (Investment + residual value) / 2

Project A = ($68,000 + 0) / 2 = $34,000

Project Z = ($92,000 + 0) / 2 = $46,000

Average rate of return = Average income / Average investment

Project A = $1,870 / $34,000 = 5.5%
Project Z = $4,600 / $46,000 = 10%

2)

Average income = ($232 - $213) X 4,900 = $93,100

Average investment = ($455,700 + $34,300) / 2 = $245,000

Average rate of return = $93,100 / $245,000 = 38%