Average Rate of Return The average rate of return is another method that does not use present values and is commonly used in making capital investment decisions. Unlike the cash payback method, the average rate of return focuses on income rather than cash flow. Assume that the investment involves an initial outlay of $100,000 with a five-year useful life and no salvage value under straight-line depreciation. The revenues are as follows: Year 1 - $50,000, Year 2 - $30,000, Year 3 - $40,000, Year 4 - $20,000 and Year 5 - $10,000. Use the minus sign to indicate a net loss. Year Revenues Expenses Net Income Year 1 Net Income (loss) = $____________ - $_______________ = $_______________ Year 2 Net Income (loss) = _______________ - _______________ = _______________ Year 3 Net Income (loss) = _______________ - _______________ = _______________ Year 4 Net Income (loss) = _______________ - _______________ = _______________ Year 5 Net Income (loss) = _______________ - _______________ = _______________ Total Net Income (five years) = $______________ Average Net Income = $_________________ / ___________________ = $__________ Average Rate of Return = $_______________ / _______________ = _________%
Average Rate of Return The average rate of return is another method that does not use present values and is commonly used in making capital investment decisions. Unlike the cash payback method, the average rate of return focuses on income rather than cash flow. Assume that the investment involves an initial outlay of $100,000 with a five-year useful life and no salvage value under straight-line depreciation. The revenues are as follows: Year 1 - $50,000, Year 2 - $30,000, Year 3 - $40,000, Year 4 - $20,000 and Year 5 - $10,000. Use the minus sign to indicate a net loss. Year Revenues Expenses Net Income Year 1 Net Income (loss) = $____________ - $_______________ = $_______________ Year 2 Net Income (loss) = _______________ - _______________ = _______________ Year 3 Net Income (loss) = _______________ - _______________ = _______________ Year 4 Net Income (loss) = _______________ - _______________ = _______________ Year 5 Net Income (loss) = _______________ - _______________ = _______________ Total Net Income (five years) = $______________ Average Net Income = $_________________ / ___________________ = $__________ Average Rate of Return = $_______________ / _______________ = _________%
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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The average rate of return is another method that does not use present values and is commonly used in making capital investment decisions. Unlike the cash payback method, the average rate of return focuses on income rather than
Assume that the investment involves an initial outlay of $100,000 with a five-year useful life and no salvage value under straight-line
Use the minus sign to indicate a net loss.
| Year | Revenues | Expenses | Net Income | |||
| Year 1 Net Income (loss) | = | $____________ | - | $_______________ | = | $_______________ |
| Year 2 Net Income (loss) | = | _______________ | - | _______________ | = | _______________ |
| Year 3 Net Income (loss) | = | _______________ | - | _______________ | = | _______________ |
| Year 4 Net Income (loss) | = | _______________ | - | _______________ | = | _______________ |
| Year 5 Net Income (loss) | = | _______________ | - | _______________ | = | _______________ |
Total Net Income (five years) = $______________
Average Net Income = |
|
= $__________ |
Average Rate of Return = |
|
= _________% |
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