Dickerson Co. is evaluating a project requiring a capital expenditure of $810,00

Question

Dickerson Co. is evaluating a project requiring a capital expenditure of $810,000. The project has an estimated life of four years and no salvage value. The estimated net income and net cash flow from the project are as follows:

The company's minimum desired rate of return is 12%. The present value of $1 at compound interest of 12% for 1, 2, 3, and 4 years is .893, .797, .712, and .636, respectively. Required: Determine the average rate of return on investment, including the effect of depreciation on the investment. Round your answer to one decimal place.

Explanation / Answer

Average net income = 320000/4 = $80000 Average investment = 810000/2 = $405000 Average rate of return on investment = 80000/405000= 19.8%

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