The expected average rate of return for a proposed investment of $500,000 in a fixed asset, with a useful life of four years, straight-line depreciation, no residual value, and an expected total net income of $240,000 for the 4 years, is
A. 18%
B. 48%
C. 24%
D. 12%
To calculate the expected average rate of return, we need to consider the initial investment, the expected total net income, and the useful life of the fixed asset.
Step 1:
The initial investment is $500,000.
Step 2:
Next, we calculate the depreciation expense per year. Since the asset has a useful life of four years and follows a straight-line depreciation method with no residual value, the annual depreciation expense will be $500,000 / 4 = $125,000.
Step 3:
Now, we calculate the annual net income. The total net income for the four years is $240,000. Therefore, the annual net income is $240,000 / 4 = $60,000.
Step 4:
To calculate the expected average rate of return, we divide the annual net income by the initial investment and express the result as a percentage:
($60,000 / $500,000) x 100 = 12%
Therefore, the expected average rate of return for the proposed investment is 12%.
The correct answer is D. 12%.