Chapter 24 — Capital Investment Analysis

[Problem Solving]

A 10-year project is estimated to cost $330,000 and have no residual value. If the straight-line
depreciation method is used and estimated total income is $115,500, determine the average rate of
return, giving effect to depreciation on the investment.

ANS:
Estimated Average Annual Income = $115,500/10     = 7%
Average Investment ($330,000 + $0)/2

Buffet Co. is considering a 5-year project that is estimated to cost $800,000 and has no residual value.
Buffet seeks to earn an average rate of return of 15% on all capital projects. Determine the necessary
average annual income (giving effect to straight-line depreciation) that must be achieved on this
project for this project to be acceptable to Buffet Co.

ANS:

Estimated Average Annual Income = Average Rate of Return

Average Investment

x         = .15
($800,000 + 0)/2

x     = .15
$400,000

x = $60,000