The anticipated purchase of a fixed asset for $400,000, with a useful life of five years and no residual value, is expected to yield total net income of $300,000 for the five years. The expected average rate of return is 30%.

Question

Quizplus · Accepted Answer

The expected average rate of return can be calculated as follows:
Average rate of return = (Total net income / Initial investment) x 100%
= (300,000 / 400,000) x 100%
= 75%

Therefore, the expected average rate of return is 75%, which is higher than the required rate of return of 30%. Hence, the purchase of the fixed asset is profitable and the statement is true.

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