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.

Q: Expert Answer

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 The average rate of return for a Testing equipment and Vehicle is as follows: Average Rate of Return of testing equipment: Average Rate of Return } = ( Estimated Average Annual Income ) ( Average Investment ) × 100 = ( $3,010 ) ( $43,000 ) × 100 =7% (Refer equation (1) and (2) of the working notes) Average Rate of Return of Vehicle: Average Rate of Return } = ( Estimated Average Annual Income ) ( Average Investment ) × 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: Average Annual Income =

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Financial & Managerial Accounting

13th Edition

Carl Warren + 2 others

Publisher: Cengage Learning

ISBN: 9781285866307

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BuyFind

Financial & Managerial Accounting

13th Edition

Carl Warren + 2 others

Publisher: Cengage Learning

ISBN: 9781285866307

Solutions

Chapter

Section

Answer 3

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Answer 4

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Answer 5

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:

Average Rate of Return } = (Estimated Average Annual Income)(Average Investment) ×100= ($3,010)($43,000) × 100=7%

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

Average Rate of Return of Vehicle:

Average Rate of Return } = (Estimated Average Annual Income)(Average Investment) ×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:

Average Annual Income =

Financial & Managerial Accounting

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Financial & Managerial Accounting

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Additional Business Textbook Solutions

	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