Determining the unadjusted rate of return Intercity Shuttle Service, Inc., is considering whether to purchase an additional

Question:

Determining the unadjusted rate of return Intercity Shuttle Service, Inc., is considering whether to purchase an additional shuttle van. The van would cost $36,000 and have a zero salvage value. It would enable the company to increase net income by $6,030 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?

Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...