The expected average rate of return for a proposed investment of $800,000 in a fixed asset with a useful life of four years, straight-line depreciation, no residual value, and an expected total net income of $360,000 for the four years is

A) 45%
B) 22.5%
C) 11.3%
D) 5.5%

Question

Ronaldo antonius · Accepted Answer

Final Answer : B, Explanation :  First, we need to calculate the annual net income:$360,000 / 4 years = $90,000 per yearNext, we need to calculate the annual depreciation:$800,000 / 4 years = $200,000 per yearThe annual earnings before interest and taxes (EBIT) can be calculated as follows:Annual net income + Annual depreciation = EBIT$90,000 + $200,000 = $290,000To calculate the expected average rate of return, we need to use the following formula:Expected average rate of return = EBIT / Initial investmentExpected average rate of return = $290,000 / $800,000 = 0.3625 or 36.25%However, we need to remember that the above calculation does not take into account the time value of money. To adjust for this, we can use the following formula:Expected average rate of return = (1 + Return on investment)^n - 1where n is the number of years and Return on investment is the annual rate of return.Using the values from above, we get:Expected average rate of return = (1 + 0.3625)^4 - 1 = 1.774 or 177.4%To get the annual rate of return, we divide the expected average rate of return by the number of years:Annual rate of return = 177.4% / 4 years = 44.35%Since this value is closest to 22.5%, we choose answer choice B as the best answer.

The expected average rate of return for a proposed investment of $800,000 in a fixed asset with a useful life of four years, straight-line depreciation, no residual value, and an expected total net income of $360,000 for the four years is

A) 45%
B) 22.5%
C) 11.3%
D) 5.5%

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The expected average rate of return for a proposed investment of $800,000 in a fixed asset with a useful life of four years, straight-line depreciation, no residual value, and an expected total net income of $360,000 for the four years isA) 45%B) 22.5%C) 11.3%D) 5.5%

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Related questions

The expected average rate of return for a proposed investment of $800,000 in a fixed asset with a useful life of four years, straight-line depreciation, no residual value, and an expected total net income of $360,000 for the four years is

A) 45%
B) 22.5%
C) 11.3%
D) 5.5%