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 $200,000 for the five years. The expected average rate of return on investment is 25%.

Question

Quizplus · Accepted Answer

The expected average rate of return on investment is calculated by dividing the annual net income by the initial investment. In this case, the annual net income would be $200,000 / 5 = $40,000. The initial investment is $400,000. Therefore, the expected average rate of return is $40,000 / $400,000 = 0.1 or 10%, not 25%.

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