Question

6. Why would the use of the cash pays natrical re- be considered Il lated to acquiring automated factory equige rmance of uipment, leases from a motion picture production studio be supported over the net present value method? Practice Exercises EE 10-1 p412 PE 10-1A Average rate of return OBJ.2 Determine the average rate of return for a project that is estimated to yield total in come of $170,000 over five years, has a cost of $320,000, and has a $20,000 residual value. HOW EE 10-1 p412 PE 10-1B Average rate of return OBJ.2 Determine the average rate of return for a project that is estimated to yield total income of $36,000 over three years, has a cost of $70,000, and has a $10,000 residual value.

Answer 1

PE 10 - 1A

Average rate of return = Average net profit / Average investment

Average net profit = $170,000 / 5

= $34,000

Average investment = ($320,000 + $20,000) / 2

=$170,000

Average rate of return = $34,000 / $170,000

= 0.2 or 20%

PE 10 - 1B

Average rate of return = Average net profit / Average investment

Average net profit = $36,000 / 3

= $12,000

Average investment = ($70,000 + $10,000) / 2

=$40,000

Average rate of return = $12,000 / $40,000

= 0.3 or 30%