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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.

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Answer:

Project                            Average rate of return

A                                                 16%

Z                                                    15%

Explanation:

The average rate of return (ARR) is the proportion of the average investment that is earned as profit.

Average rate of return(ARR) = average operating income/ Average investment

Project A=

Average income = 57,600/12 = 4800

Average investment = (55,000 + 5,000)/2 = 30000

ARR = 4,800/30,000 × 100 = 16%

Projecr Z

Average income = 63,000/15= 4200

Aveage investment = (50,000 + 6,000)/2= 28,000

ARR = 4,200/28,000× 100 = 15%

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