Chapter 26, Problem 3DQ

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:

$\text{Average}\text{Rate}\text{of}\text{Return}\}\text{=}\frac{\left(\text{Estimated}\text{Average}\text{Annual}\text{Income}\right)}{\left(\text{Average}\text{Investment}\right)}\text{}\times 100$

Internal rate of return method

Internal rate of return method is one of the capital investment methods which determine the rate of return, wherein the net present value of all the cash flows (both positive and negative) from an investment is zero. This method is also called as the time-adjusted rate of return method. It used to evaluate the different proposal’s expected rate of return.

To determine: The reasons for the difference between the average rate of return and the internal rate of return on the same project.