Question

Five alternatives are being evaluated by the incremental rate of return method . Incremental Initial Overall ROR Rate of Return Alternative Investment , S versus DN . % A B C D A -25.000 9.6 - 27.3 9.4 35.3 25.0 B 15.1 0 38.5 24.4 C - 40,000 13.4 - 46.5 27.3 D -60,000 25.4 6.8 E -75,000 20.2 - 35.000 If the projects above are independent , the one or ones to select at an MARR of 18 % per year are Select one : a . B and C b . B , D and E c . D and E d . B , C , and E

Answer 1

Project A has the minimum investment select it as base selection then B has second lowest investment. Compare these two alternatives on the basis of incremental IRR.

∆IRR (B -A) = 27.3% , it is greater than MARR thus reject A and Select B as new defender.

Now compare B with C. The incremental IRR between B and C is

∆IRR (C -B) = 0, less than MARR thus select B.

Now comparing B and D

∆IRR (D - B) = 38.5%, greater than MARR thus select D as new defender.

Comparing D with E

∆IRR(E-D) = 6.8%, less than MARR. Select D.

The projects are independent thus we can select D and E.

Answer is D and E.

Because D and E are having higher IRR than other 3 projects, even in terms of Incremental IRR these two must be better.

Note: If we go by IRR technique then we can see the IRR of A, B and C is less than 18% thus we can reject these alternatives. So we are left with only D and E.

Please contact if in case you have any doubt regarding the solution will be extremely obliged to you for your generous support. Your help mean a lot to me, please help. Thank you.