The anticipated purchase of a fixed asset for $400,000 with auseful life of 5 ye

Question

The anticipated purchase of a fixed asset for $400,000 with auseful life of 5 years and no residual value is expected to yieldtotal income of $150,000. The expected average rate of return,giving effect to depreciation on investment is 15%.
a. True b. False The anticipated purchase of a fixed asset for $400,000 with auseful life of 5 years and no residual value is expected to yieldtotal income of $150,000. The expected average rate of return,giving effect to depreciation on investment is 15%.
a. True b. False

Explanation / Answer

Average income per year = 150,000 / 5 = 30,000 Depreciation per year = 400,000 / 5 = 80,000 Asset Value: Yr 1: 400,000 Yr 2: 320,000 Yr 3: 240,000 Yr 4: 160,000 Yr 5: 80,000 ROI Yr 1: 30,000 / 400,000 = 7.5% Yr 2: 30,000 / 320,000 = 9.375% Yr 3: 30,000 / 240,000 = 12.5% Yr 4: 30,000 / 160,000 = 18.75% Yr 5: 30,000 / 80,000 = 37.5% Average Rate: 17.125%

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