The anticipated purchase of a fixed asset for $400,000, with a useful life of 5 years and no residual value, is expected to yield total net income of $200,000 for 5 years.The expected average rate of return on investment computed is 20%.

Question

Quizplus · Accepted Answer

The expected average rate of return on investment computed is (Net income/Initial investment) x 100%. 
Here, the net income for 5 years is $200,000 per year x 5 years = $1,000,000. 
The initial investment is $400,000. 
So, the expected average rate of return on investment computed is ($1,000,000/$400,000) x 100% = 250%. 
Since this is greater than the given 20%, the statement is false. However, if the net income for 5 years was $80,000 per year instead of $200,000, then the expected average rate of return would be 20%.

The Anticipated Purchase of a Fixed Asset for $400,000, with a Useful