The following data are accumulated by Eco Labs, Inc. in evaluating two competing

Question

The following data are accumulated by Eco Labs, Inc. in evaluating two competing capital investment proposals:

Determine the expected average rate of return for each proposal. If required, round your answers to one decimal place.

The following data are accumulated by Eco Labs, Inc. in evaluating two competing capital investment proposals:

Testing Equipment Vehicle Amount of investment $64,000 $28,000 Useful life 4 years 5 years Estimated residual value 0 0 Estimated total income over the useful life $10,240 $7,700

Determine the expected average rate of return for each proposal. If required, round your answers to one decimal place.

Testing Equipment % Vehicle %

Explanation / Answer

Expected average rate of return = Estimated total income per year / Average investment

Testing equipment:

Step 1: Estimated total income per year = $10,240 / 4 years = $2,560

Step 2: Average investment = $64,000 / 2 = $32,000

Step 3: Expected average rate of return =$2,560 / $32,000 =0.08 (or) 8%

Vehicle:

Step 1: Estimated total income per year = $7,700 / 5 years = $1,540

Step 2: Average investment = $28,000 / 2 = $14,000

Step 3: Expected average rate of return =$1,540 / $14,000 =0.11 (or) 11%

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