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 over the 5 years. The expected average rate of return is 25%.

Question

Quizplus · Accepted Answer

The expected average rate of return is calculated as the average annual net income divided by the initial investment cost. Here, the average annual net income would be $200,000 / 5 = $40,000. The initial investment is $400,000. Thus, 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