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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Average rate of return

Determine the average rate of return for a project that is estimated to yield total income of $56,000 over three years, has a cost of $70,000, and has a $10,000 residual value.

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.

Calculation of Average rate of return:

AverageRateofReturn}=(EstimatedAverageAnnualIncome)(AverageInvestment)×100

To determine: The average rate of return for a project.

Explanation

The average rate of return for the project is 30%.

Working Notes:

Calculation of Average Rate of Return:

AverageRateofReturn}=(EstimatedAverageAnnualIncome)(AverageInvestment)×100=($12,000)($40,000)×100=30%

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

Calculation of Average Annual Income:

Average

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