Question

You are comparing two mutually exclusive alternatives where only cost information is available. Indicate which of the following subsections is false if we make a present value analysis of the investment increase (incremental analysis) at a given interest, MARR. Remember that the assumption inherent in this type of analysis is that the benefits will be the same regardless of the alternative selected.

Select one:
a. If the PW is less than zero, we select the alternative with the lowest initial investment.
b. The rate of return on the investment increase must be higher than the MARR in order to justify spending on the more expensive alternative.
c. None of the alternatives should be selected if there is only cost data because a rate of return cannot be calculated.
d. If the resulting PW is greater than or equal to zero, we select the alternative that has the highest cost in the initial investment.

Answer 1

Give, two mutually exclusive alternatives with the only cost information. Benefits will be the same regardless of the alternative.

a. If the PW is less than zero, we select the alternative with the lowest initial investment.- FALSE

If PW is less than zero it does not make sense to choose either of the alternatives.Both the alternatives must be rejected if PW is less than zero.

b. The rate of return on the investment increase must be higher than the MARR in order to justify spending on the more expensive alternative.- FALSE

Not only the rate of return must be greater than MARR, but the rate of return of the expensive alternative must be greater than the rate of return of the cheaper alternative.

c. None of the alternatives should be selected if there is only cost data because a rate of return cannot be calculated.-TRUE

The following statement is true as rate of return is important to decide whether either of the projects is fruitful

d. If the resulting PW is greater than or equal to zero, we select the alternative that has the highest cost in the initial investment.- FALSE

If PW is greater than one, its makes the project viable. However, an alternative with a lower cost in the initial investment must be chosen.