The average rate of return for this investment isA) 18%B) 16%C) 58%D) 10%

Question

Princess Antwi · Accepted Answer

Final Answer : B, Explanation :  To calculate the average rate of return, we need to find the total net profit and divide it by the total investment. The total net profit is the sum of the annual net cash flows minus the depreciation expense.Using the given table, we can calculate the annual net cash flows as follows:Year 1: $245,000Year 2: $245,000Year 3: $130,000Year 4: $130,000Year 5: $130,000The depreciation expense is calculated by dividing the cost of the machine by its useful life. Here, the cost of the machine is $490,000 and its useful life is 5 years. So, the annual depreciation expense is $98,000 ($490,000 / 5).Thus, the total net profit for the 5-year period is:$245,000 + $245,000 + $130,000 + $130,000 + $130,000 - $98,000 - $98,000 - $98,000 - $98,000 - $98,000= $558,000The total investment is $490,000.Therefore, the average rate of return is ($558,000 / $490,000) x 100% = 113.88%.Since the average rate of return is greater than the desired rate of return of 10%, the investment is acceptable.However, the options for the best choice are not provided in the question.

The average rate of return for this investment is

A) 18%
B) 16%
C) 58%
D) 10%

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