Question

Pepper Company is using the annual rate of return to evaluate a potential investment. The original investment required is $120,000, and the investment’s salvage value is $20,000. What is the average investment that Pepper will use when computing the annual rate of return?

A : $60,000

B : $70,000

C : $50,000

D : Cannot be determined unless the useful life of the project is known.

Answer 1

Answer:

B : $70,000

Explanation:

The formula and the computation of the  annual rate of return is shown below:

= Annual net income ÷ average investment

where,  

Annual net income is XXXXX

And, the average investment would be

= (Original investment required + salvage value) ÷ 2

= (120,000 + $20,000) ÷ 2

= $140,000 ÷ 2

= $70,000

By placing these values we can easily compute the annual rate of return