Rainbow Painting Company is considering whether to purchase a new spray paint machine that costs $16,000. The machine is expected to save labor, increasing net income by $1,200 per year. The effective life of the machine is 15 years according to the manufacturer's estimate.

Required

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

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