The average rate of return for this investment isA) 5%B) 10%C) 25%D) 15%

Question

Harshal Patil · Accepted Answer

Final Answer : B, Explanation :  To calculate the average rate of return, we need to find the total net income generated by the investment over its life and divide it by the original cost of the investment. The total net income is the sum of the annual net income generated by the investment, which is the annual cash inflow (in this case, $105,000) minus the annual cost (which includes both depreciation and interest on the initial investment).So, annual cost = depreciation + (interest rate x initial investment)= $75,000 + (0.06 x $375,000)= $96,000Therefore, annual net income = $105,000 - $96,000 = $9,000The total net income over the life of the investment is $9,000 x 5 = $45,000.So, the average rate of return = ($45,000 ÷ $375,000) x 100%= 12%Since the desired rate of return is 6%, and the actual average rate of return is 12%, the investment is acceptable. Therefore, Choice B is the best answer.

The average rate of return for this investment is

A) 5%
B) 10%
C) 25%
D) 15%

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