Average Rate of Return The following data are accumulated by Watershed Inc. in evaluating two competing capital investment proposals: Project A Project Z Amount of investment $55,000 $50,000 Useful life 12 years 15 years Estimated residual value $5,000 $6,000 Estimated total income over the useful life $57,600 $63,000 Determine the expected average rate of return for each project. Project A % Project Z % I was following this formula Average total income = Total income over the useful life / Useful life Average investment = (Cost + Residual Value) / 2 Average rate of return = Average total income / Average investment
But still got the wrong answers
| Average total income = Total income over the useful life / Useful life | |||||||||
| Project A | =$57600/12 | ||||||||
| =$4800 per year | |||||||||
| Project Z =$63000/15 years | |||||||||
| =$4200 | |||||||||
| Average investment = (Cost + Residual Value) / 2 | |||||||||
| Project A = (55000+5000)/2 | |||||||||
| =$30000 | |||||||||
| Project Z= (50000+6000)/2 | |||||||||
| =$28000 | |||||||||
| The average rate of return = Average total income / Average investment | |||||||||
| Project A = $4800/30000 | |||||||||
| 16% | |||||||||
| Project B = $4200/28000 | |||||||||
| 15% | |||||||||
Average Rate of Return The following data are accumulated by Watershed Inc. in evaluating two competing...