T hree mutually exclusive revenue alternati consideration to increase the produc

Question

T hree mutually exclusive revenue alternati consideration to increase the productivit costs and cash flows of each alternat year, answer the following questions ves that have infinite lives are under company in Qatar. The initial y of a construction ive are shown. Assuming the MARR is 14.5% Initial Cost (s) Revenue (5s per year) Rate of Return (%) -16,000 2,200 2 -3,000 1,400 15.6% 16.7% ) Calculate the Rate of Return of Alternative Z. 2) Using the Incremental ROR Analysis Nothing" is not an option) which alternative should be selected? "Do-

Explanation / Answer

let rate of return be i

so 16000 = 2200/(1+i) + 2200/(1+i)^2 + 2200/(1+i)^3 +.........

16000 = 2200/(1+i) [ 1+1/(1+i) +1/(1+i)^2+.........

when i>1, 1/(1+i) <1 , in that case

then RHS become 2200/(1+i) [1/1-(1/(1+i))] ;

= 2200 *i /(1+i)^2 = 16000

solving i=1.334; so R= 13.6%

the alternative which provides better return should be selected, in this case it is Y

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