Chapter 11, Problem 2E

To determine

Average rate of return method:

Average rate of return is the amount of income which is earned over the life of the investment. It is used to measure the average income as a percent of the average investment of the business, and it is also known as the accounting rate of return.

The average rate of return is computed as follows:

$\text{Average rate of return =}\frac{\text{Estimated average annual income}}{\text{Average investment}}$

The average rate of return on the equipment.