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Average annual income from a proposed asset is $15,000 and the average investment is $60,000. What is the average rate of return?
A15%
B20%
C30%
D25%
Answer & Solution
Correct answer: D. 25%
1. The average rate of return divides average annual income by average investment.
2. $15,000 divided by $60,000 gives 25%.
3. Average investment itself is the opening book value plus the residual value, halved.
4. The 25% is then judged against the minimum return management demands.
5. A proposal that clears that hurdle is examined further, and one that fails it is dropped.
_Source: Jonick, Principles of Managerial Accounting (UNG Press, CC BY-SA 4.0), section 9.8 Capital Investment Analysis_
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