Nguyen Company has an opportunity to purchase an asset that will cost the company $36,000.The asset is expected to add $12,000 per year to the company's net income.Assuming the asset has a five-year useful life and zero salvage value,the unadjusted rate of return based on the average investment will be:

Question

Quizplus · Accepted Answer

The unadjusted rate of return is calculated by dividing the expected annual income by the initial investment cost:

Unadjusted rate of return = (Expected annual income / Initial investment cost) × 100%

Expected annual income = $12,000
Initial investment cost = $36,000

Unadjusted rate of return = ($12,000 / $36,000) × 100% = 33.33%

However, since the asset has a five-year useful life with zero salvage value, the average investment cost over the asset's life is not equal to the initial investment cost. The average investment cost can be calculated by adding the initial investment cost and the salvage value (which is zero) and dividing the result by two.

Average investment cost = (Initial investment cost + Salvage value) / 2 = ($36,000 + $0) / 2 = $18,000

Using the average investment cost, the unadjusted rate of return can be recalculated:

Unadjusted rate of return = (Expected annual income / Average investment cost) × 100%

Unadjusted rate of return = ($12,000 / $18,000) × 100% = 66.67%

Therefore, the best answer choice is A) 66.67%.

Nguyen Company Has an Opportunity to Purchase an Asset That