Annual Rate of Return

# Annual Rate of Return - Annual Rate of Return The annual...

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Annual Rate of Return The annual rate of return technique is based directly on accounting data. It indicates the profitability of a capital expenditure by dividing expected annual net income by the average investment. Illustration 23-17 shows the formula for computing annual rate of return. Illustration 23-17 Annual rate of return formula Expected annual net income is obtained from the projected income statement. Tappan Company's expected annual net income is \$13,000. Average investment is derived from the following formula. Illustration 23-18 Formula for computing average investment The “value at the end of useful life” is the asset's salvage value, if any. For Tappan Company, average investment is \$65,000 ((\$130,000 + \$0) ÷ 2). The expected annual rate of return for Tappan Company's investment in new equipment is therefore 20%, computed as follows:

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Alternative Terminology The minimum rate of return is also called the hurdle rate or cutoff rate . Management then compares this annual rate of return with its required
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## This note was uploaded on 11/08/2011 for the course ACCOUNTING ac 202 taught by Professor - during the Fall '11 term at Montgomery.

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Annual Rate of Return - Annual Rate of Return The annual...

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