The anticipated purchase of a fixed asset for $400,000, with a useful life of 5 years and a $40,000 residual value, is expected to yield total net income of $200,000 for 5 years.The expected average rate of return on investment is 18.2%.

Question

Quizplus · Accepted Answer

To calculate the expected rate of return on investment, we can use the following formula:

Expected Rate of Return = (Total Net Income / Initial Investment) / Number of Years

Plugging in the given values, we get:

Expected Rate of Return = ($200,000 / $400,000) / 5 = 0.10

To convert this into a percentage, we multiply by 100:

Expected Rate of Return = 10%

However, the question states that the expected average rate of return on investment is 18.2%. Therefore, the statement is false.

But, the calculation is incorrect. The expected rate of return (using the formula above) should be:

Expected Rate of Return = [(Total Net Income + Residual Value) / Initial Investment] / Number of Years

Expected Rate of Return = [($200,000 + $40,000) / $400,000] / 5 = 0.12

Converting to a percentage:

Expected Rate of Return = 12%

Since the given expected average rate of return (18.2%) is greater than the actual expected rate of return (12%), the statement remains false.

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