Question

Given the following 4 alternatives, the best alternative using the incremental ROR analysis at MARR= 13% is:

Dealer	1	2	3	4
First Cost, $	-5,000	-6,500	-10,000	-15,000
Annual Average Cost per repair, $	-3500	-3200	-3000	-2000
Close-out value, $	+500	+900	+700	+1000
Life, years	8	8	8	8

Group of answer choices

Alt. 1

Alt. 2

Alt. 3

Alt. 4

Answer 1

Alternative 1 has the lowest initial investment therefore, consider it as base selection and alternative 2 has second lowest cost thus, calculating the incremental cash flow by subtracting cash flow of 1 from cash flow of 2.

The Incremental IRR is greater than MARR. Therefore, reject alternative 1 and accept alternative 2.

Now, compare alternative 2 and 3.

Reject alternative 3. Accept alternative 2.

Now compare alternative 2 and alternative 4.

Accept alternative 2.

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