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In: Accounting

Average Rate of Return The following data are accumulated by Eco Labs, Inc. in evaluating two...

Average Rate of Return

The following data are accumulated by Eco Labs, Inc. in evaluating two competing capital investment proposals:

Testing Equipment Vehicle
Amount of investment $40,000 $48,000
Useful life 4 years 5 years
Estimated residual value 0 0
Estimated total income over the useful life $6,000 $12,600

Determine the expected average rate of return for each proposal. If required, round your answers to one decimal place.

Testing Equipment %
Vehicle %

Solutions

Expert Solution

Average rate of return for testing Equipment:

Formula for average rate of return = Estimated total income per annum/Average investment

         Estimated total income per annum = $ 6000/4

                                                                    = $ 1500

Average investment = (Investment – salvage value)/2

                                 = ($40,000)/2 = $20000

ARR = $ 1500 / $ 20000 = 7.50%

Average rate of return for testing Equipment:

Estimated total income per annum = $12600/5

                                                        = $2520

Average investment = $48,000/2 = $24,000

            ARR = $2520/$24,000

                     = 10.50%


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