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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

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

  3D Printer Truck
Amount of investment $40,000 $50,000
Useful life 7 years 10 years
Estimated residual value $3,000 $6,000
Estimated total income over the useful life $24,080 $36,400

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.

Calculation of Average rate of return:

AverageRateofReturn}=(EstimatedAverageAnnualIncome)(AverageInvestment)×100

To determine: The average rate of return for a 3D Printer and truck.

Explanation

The average rate of return for the two proposals i.e. 3D Printer and Truck are 16% and 13% respectively.

Working Notes:

Calculation of Average Rate of Return of 3D Printer:

AverageRateofReturn}=(EstimatedAverageAnnualIncome)(AverageInvestment)×100=($3,440)($21,500)×100=16%

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

Calculation of Average Annual Income 3D Printer:

AverageAnnualIncome=TotalAnnualIncomeNumberofYears=$24,0807=$3,440

(1)

Calculation of Average Investment 3D Printer:

Average Investment=(Projectcost+ResidualValue)2=($40,000+$3,000)2=$21,500

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