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 income of $150,000.The expected average rate of return,giving effect to depreciation on investment,is 15%.

Question

Quizplus · Accepted Answer

The average rate of return on investment can be calculated using the formula:
Average Rate of Return = (Total Income - Depreciation Expense) / Initial Investment
Here, the initial investment is $400,000 and the useful life of the asset is 5 years with no residual value, so the yearly depreciation expense would be $80,000 ($400,000 / 5). Therefore, the equation becomes:
Average Rate of Return = ($150,000 - $80,000) / $400,000
= $70,000 / $400,000
= 0.175 or 17.5%

Since the expected average rate of return is 15%, which is lower than the calculated rate of 17.5%, the statement is true.

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