The expected average rate of return for a proposed investment of $3,000,000 in a fixed asset giving effect to depreciation (straight-line method)with a useful life of 20 years,no residual value,and an expected total income of $6,000,000 is:

Question

Quizplus · Accepted Answer

To calculate the expected average rate of return, we need to use the formula:

Expected Average Rate of Return = (Expected Total Income - Initial Investment + Depreciation) / Initial Investment

Using the given information, we can plug in the values:

Expected Average Rate of Return = ($6,000,000 - $3,000,000 + $150,000) / $3,000,000

We calculated the depreciation using the straight-line method, which divides the initial investment by the useful life of the asset to obtain the annual depreciation. So, $3,000,000 divided by 20 years is $150,000 of annual depreciation.

Simplifying the equation, we get:

Expected Average Rate of Return = $3,150,000 / $3,000,000

Expected Average Rate of Return = 1.05 or 105%

Converting to a percentage, we get:

Expected Average Rate of Return = 20%

Therefore, the best choice is D, with an expected average rate of return of 20%.

The Expected Average Rate of Return for a Proposed Investment