   Chapter 26, Problem 26.1BPE

Chapter
Section
Textbook Problem

Average rate of returnDetermine 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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