Kokomo Shuttle Service Inc. is considering whether to purchase an additional shuttle van. The van would cost $45,000 and have a zero salvage value. It would enable the company to increase net income by $6,750 per year. The manufacturer estimates the van’s effective life as five years.

Required

a. Determine the unadjusted rate of return based on the average cost of the investment.

b. What is the shortcoming of using the unadjusted rate of return to evaluate investment opportunities?