The following data are accumulated by Watershed Inc. in evaluating two competing capital investment proposals: Project A Project Z Amount of investment $55,000 $50,000 Useful life 12 years 15 years Estimated residual value $5,000 $6,000 Estimated total income over the useful life $57,600 $63,000 Determine the expected average rate of return for each project.

Question

Jesse Lutz

Business

1 March, 14:40

The following data are accumulated by Watershed Inc. in evaluating two competing capital investment proposals: Project A Project Z Amount of investment $55,000 $50,000 Useful life 12 years 15 years Estimated residual value $5,000 $6,000 Estimated total income over the useful life $57,600 $63,000 Determine the expected average rate of return for each project.

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Tiara Blackburn · Answer 1

Project Average rate of return

A 16%

Z 15%

Explanation:

The average rate of return (ARR) is the proportion of the average investment that is earned as profit.

Average rate of return (ARR) = average operating income / Average investment

Project A=

Average income = 57,600/12 = 4800

Average investment = (55,000 + 5,000) / 2 = 30000

ARR = 4,800/30,000 * 100 = 16%

Projecr Z

Average income = 63,000/15 = 4200

Aveage investment = (50,000 + 6,000) / 2 = 28,000

ARR = 4,200/28,000 * 100 = 15%