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A proposed asset is expected to generate income of $75,000 over a useful life of five years. What is its average annual income?
A$10,000
B$12,500
C$15,000
D$18,750
Answer & Solution
Correct answer: C. $15,000
1. Average annual income divides total estimated income over the asset's life by the number of years in that life.
2. $75,000 divided by 5 years gives $15,000 a year.
3. That figure becomes the numerator of the average rate of return.
4. The denominator is built separately, from the opening and closing book values.
_Source: Jonick, Principles of Managerial Accounting (UNG Press, CC BY-SA 4.0), section 9.8 Capital Investment Analysis_
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