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

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Accounting

Average Rate of Return

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

Testing EquipmentVehicle
Amount of investment$40,000$48,000
Useful life4 years5 years
Estimated residual value00
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%

Answer & Explanation Solved by verified expert
3.8 Ratings (497 Votes)

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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