1.What are the principal objections to the use of the average rate of return in

Question

1.What are the principal objections to the use of the average rate of return in evaluating capital investment proposals?

2. Discuss the principal limitations of the cash payback method for evaluating capital investment proposals.

3. The following data are accumulated by ChemLabs, Inc. in evaluating two competing capital investment proposals:

                                        Testing Equipment                      Vehicle

Amount of investment       $90,000     $25,000

Useful life       6 years                                       8 years

Estimated residual value    0                                                0

Estimated total income over the useful life $24,300           $15,000

Determine the expected average rate of return for each proposal.

Explanation / Answer

1. It takes profit into account which itself is a debatable subject due to bad debts, depreciation. Should take cashflow. It does not take into account time value of money 2. Does not take into account time value of money.

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