Average Rate of Return

Theaverage rate of returnis another method that does not use present value and is commonly used in making capital investment decisions. Unlike the cash payback method, the average rate of return focuses on income rather than cash flow.

Assume that the investment involves an initial outlay of $100,000 with a five-year useful life and no salvage value under straight-line depreciation. The revenues are as follows: Year 1 - $50,000, Year 2 - $30,000, Year 3 - $40,000, Year 4 - $20,000 and Year 5 - $10,000.

Use the minus sign to indicate a net loss. If an amount is zero, enter "0".

YearRevenuesExpensesNet IncomeYear 1 Net Income (loss)=$-$=$Year 2 Net Income (loss)=-=Year 3 Net Income (loss)=-=Year 4 Net Income (loss)=-=Year 5 Net Income (loss)=-=

Total Net Income (five years) = $

Average Net Income =$

= $

Average Rate of Return =$$

=%