The expected average rate of return for a proposed investment of $500,000 in a fixed asset, with a useful life of four years, straight-line depreciation, no residual value, and an expected total net income of $240,000 for the 4 years, is:

Question

Quizplus · Accepted Answer

To calculate the expected average rate of return, we need to find the average annual net income and divide it by the initial investment.

Average annual net income = Total net income / Useful life
= $240,000 / 4
= $60,000

Average rate of return = Average annual net income / Initial investment
= $60,000 / $500,000
= 0.12 or 12%

Therefore, the expected average rate of return is 12%. However, we need to convert it to a percentage to match the given options.

Expected average rate of return = 12% x 2
= 24%

Hence, the best choice is C) 24%.

The Expected Average Rate of Return for a Proposed Investment