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 income of $150,000 (recognition is given to the effect of straight-line depreciation on the investment).The expected average rate of return is 15%.

Question

Quizplus · Accepted Answer

The average rate of return is calculated as (Total income / Average investment) * 100. The average investment is calculated as (Initial investment + Residual value) / 2. In this case, the residual value is 0, so the average investment is $400,000 / 2 = $200,000. The average rate of return is therefore ($150,000 / $200,000) * 100 = 15%.

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