The following data are accumulated by Bio Metrics Inc. in evaluating two competing capital investment proposals:

The following data are accumulated by Bio Metrics Inc. in evaluating two competing capital investment proposals:


                                      Testing Equipment | Vehicle
Amount of investment                 $104,000 | $32,000
Useful life                                        6 years | 8 years
Estimated residual value                           0 |       0
Estimated total income over the
useful life                                       $18,720 | $15,360

Determine the expected average rate of return for each proposal.


Answer:


Testing 
Equipment Vehicle 
$18,720 ÷ 6……………………………………………………………… $3,120 
$15,360 ÷ 8……………………………………………………………… $1,920 
Average investment: 
($104,000 + $0) ÷ 2………………………………………………………   $52,000 
($32,000 + $0) ÷ 2……………………………………………………… $16,000 
Average rate of return: 
$3,120 ÷ $52,000………………………………………………………… 6% 
$1,920 ÷ $16,000……………………………………………………… 12%