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Average rate of return The following data are accumulated by ChemLab Inc. in evaluating two competing capital investment proposals: Testing Equipment Vehicle Amount of investment $86,000 $30,000 Useful life 6years 8years Estimated residual value 0 0 Estimated total income over the useful life $18,060 $12,000 Determine the expected average rate of return for each proposal.

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Financial & Managerial Accounting

13th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781285866307

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Section
BuyFindarrow_forward

Financial & Managerial Accounting

13th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781285866307
Chapter 25, Problem 25.1EX
Textbook Problem
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Average rate of return

The following data are accumulated by ChemLab Inc. in evaluating two competing capital investment proposals:

Testing Equipment Vehicle
Amount of investment $86,000 $30,000
Useful life 6years 8years
Estimated residual value 0 0
Estimated total income over the useful life $18,060 $12,000

Determine the expected average rate of return for each proposal.

To determine

Average Rate of Return:

Average rate of return is a method that measures the average earnings of a particular business, as a percentage of the average investment. It is also known as accounting rate of return.

To determine: The average rate of return for a Testing equipment and Vehicle.

Explanation of Solution

The average rate of return for a Testing equipment and Vehicle is as follows:

Average Rate of Return of testing equipment:

AverageRateofReturn}=(EstimatedAverageAnnualIncome)(AverageInvestment)×100=($3,010)($43,000)×100=7%

(Refer equation (1) and (2) of the working notes)

Average Rate of Return of Vehicle:

AverageRateofReturn}=(EstimatedAverageAnnualIncome)(AverageInvestment)×100=($1,500)($15,000)×100=10%

(Refer equation (3) and (4) of the working notes)

Working Notes:

Calculate the Average Annual Income testing equipment:

AverageAnnualIncome=

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Chapter 25 Solutions

Financial & Managerial Accounting
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