Question

19*The four revenue alternatives described below are being evaluated by the rate of return method. If the alternatives are mutually exclusive, which one(s) should be selected when the MARR is 15% per year? Alternative Initial Investment ($) Overall Rate of Return Incremental Rate of Return (%) When Compared with Alternative i* (%) A B C A -80,000 12 B -110,000 25 42 C -150,000 20 25 10 D -230,000 16 18 13 12

Answer 1

	INITIAL INVESTMENT	RATE OF	Incremental Return
	%	RETURN	A	B	C
A	-80,000	12
B	-110,000	25	42
C	-150,000	20	25	10
D	-230,000	16	18	13	12

MARR = 15%

Here RoR of B, C and D is greater than MARR while of A it is less than MARR. So do nothing is rejected.

Let us assume A as the base alternative then do the Incremental analysis between next cheap alternative here alternative B.

Since, incremental RoR between B and A is 42% that is greater than MARR. Hence, select Alternative B .

Now B is the base alternative. Now do the Incremental analysis between B and next cheap alternative that is C

Reject C since, incremental RoR between C and B is less than MARR.

Now do the Incremental analysis between B and D

Reject D. Since MARR is greater than Incremental RoR.

Select Alternative B.

Please contact if having any query thank you.