Question Content Area

Click to watch the Tell Me More Learning Objective $2$ video and then answer the questions below.

$1.$ Assume that management is evaluating the purchase of a new machine as follows:

Cost of new machine: $$800,000$

Residual value: $$0$

Estimated total income from machine: $$300,000$

Expected useful life: $5$ years

The average rate of return of a new equipment is $\_\_\_\_\_.$

$15\%$

$15\mathrm{.}5\%$

$17\%$

$17\mathrm{.}5\%$

$2.$ All of the following are advantages of using the average rate of return method except $\_\_\_\_\_\_\_\_.$

it is easy to compute

it includes the entire amount of income earned over the life of the proposal

it emphasizes accounting income, which is often used by investors and creditors in evaluating management performance

it directly considers the expected cash flows from the proposal