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 - $20,000, Year 2 - $30,000, Year 3 - $40,000, Year 4 - $50,000 and Year 5 - $60,000.

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

Year Revenue Expenses Net Income

Year 1 Net Income (loss) = $20,000 - $___________ = $_____________

Year 2 Net Income (loss) = 30,000 - _____________ = _______________

Year 3 Net income (loss) = 40,000 - _____________ = _______________

Year4 Net Income (loss) = 50,000 - _____________ = _______________

Year 5 Net Income (loss) = 60,000 - _____________ = _______________

Total Net income (Five Years) = $ ____________

Average Net Income= $______________

______________ = $____________

Average Rate Return $_____________

_______________ = _______________%