Average Rate of Return The average rate of return is another method that does not use present values and is commonly used in making capital investment decisions. Unlike the cash payback method, the average rate of return focuses on income rather than cash flow. Assume that the investment involves an initial outlay of $100,000 with a five-year useful life and no salvage value under straight-line depreciation. The revenues are as follows: Year 1 - $50,000, Year 2 - $30,000, Year 3 - $40,000, Year 4 - $20,000 and Year 5 - $10,000. Use the minus sign to indicate a net loss. Year Revenues Expenses Net Income Year 1 Net Income (loss) = $____________ - $_______________ = $_______________ Year 2 Net Income (loss) = _______________ - _______________ = _______________ Year 3 Net Income (loss) = _______________ - _______________ = _______________ Year 4 Net Income (loss) = _______________ - _______________ = _______________ Year 5 Net Income (loss) = _______________ - _______________ = _______________ Total Net Income (five years) = $______________ Average Net Income = $_________________ / ___________________ = $__________ Average Rate of Return = $_______________ / _______________ = _________%
Average Rate of Return The average rate of return is another method that does not use present values and is commonly used in making capital investment decisions. Unlike the cash payback method, the average rate of return focuses on income rather than cash flow. Assume that the investment involves an initial outlay of $100,000 with a five-year useful life and no salvage value under straight-line depreciation. The revenues are as follows: Year 1 - $50,000, Year 2 - $30,000, Year 3 - $40,000, Year 4 - $20,000 and Year 5 - $10,000. Use the minus sign to indicate a net loss. Year Revenues Expenses Net Income Year 1 Net Income (loss) = $____________ - $_______________ = $_______________ Year 2 Net Income (loss) = _______________ - _______________ = _______________ Year 3 Net Income (loss) = _______________ - _______________ = _______________ Year 4 Net Income (loss) = _______________ - _______________ = _______________ Year 5 Net Income (loss) = _______________ - _______________ = _______________ Total Net Income (five years) = $______________ Average Net Income = $_________________ / ___________________ = $__________ Average Rate of Return = $_______________ / _______________ = _________%
Managerial Accounting: The Cornerstone of Business Decision-Making
7th Edition
ISBN:9781337115773
Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Publisher:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Chapter12: Capital Investment Decisions
Section: Chapter Questions
Problem 37E
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Average
The average rate of return is another method that does not use present values and is commonly used in making capital investment decisions. Unlike the cash payback method, the average rate of return focuses on income rather than cash flow.
Assume that the investment involves an initial outlay of $100,000 with a five-year useful life and no salvage value under straight-line
Use the minus sign to indicate a net loss.
| Year | Revenues | Expenses | Net Income | |||
| Year 1 Net Income (loss) | = | $____________ | - | $_______________ | = | $_______________ |
| Year 2 Net Income (loss) | = | _______________ | - | _______________ | = | _______________ |
| Year 3 Net Income (loss) | = | _______________ | - | _______________ | = | _______________ |
| Year 4 Net Income (loss) | = | _______________ | - | _______________ | = | _______________ |
| Year 5 Net Income (loss) | = | _______________ | - | _______________ | = | _______________ |
Total Net Income (five years) = $______________
Average Net Income = |
|
= $__________ |
Average Rate of Return = |
|
= _________% |
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