Question
Asked Dec 6, 2019
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The following data are accumulated by Watershed Inc. in evaluating two competing capital investment proposals:

  Project A Project Z
Amount of investment $64,000     $84,000  
Useful life 4 years     9 years  
Estimated residual value 0     0  
Estimated total income over the useful life $8,960     $43,470  

Determine the expected average rate of return for each project. Round your answers to one decimal place.

Project A %
Project Z %
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Expert Answer

Step 1

Hence, the annual net income for project A is $2,240. It is obtained by dividing total net income over the useful life by useful life.

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Total net income over the useful life Annual net income for project A Useful life $8,960 4 = $2,240

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Step 2

Hence, the average investment for project A is $32,000. It is obtained by dividing the sum of amount of investment and residual value by 2.

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Amount of investment + Residual value Average investment for project A = %3D $64,000+ $0 = $32,000

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Step 3

Hence, the average rate of return for project A is 7%. It is obtain...

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Annual net income Average rate of return for project A Average investment $2,240 $32,000 = 7% %3D

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