There are 5 alternatives to be considered: a 1 , a 2 , a 3 , a 4 and a 5 with th
ID: 2648016 • Letter: T
Question
There are 5 alternatives to be considered: a1, a2, a3, a4 and a5 with the corresponding investment of $100, $200, $300, $400 and $500 respectively. If MARR = 12%, find the best alternative based upon the calculated incremental rate of return table presented below
Incremental ROR for Column Y-X
(column X)
(column Y)
DNT
a1
a2
a3
a4
a5
a1
14%
-
a2
16%
11.2%
-
a3
20%
14.2%
11%
-
a4
13%
15%
9%
28.8%
-
a5
18%
19.1%
12%
20%
12.2%
There are 5 alternatives to be considered: a1, a2, a3, a4 and a5 with the corresponding investment of $100, $200, $300, $400 and $500 respectively. If MARR = 12%, find the best alternative based upon the calculated incremental rate of return table presented below
Incremental ROR for Column Y-X
(column X)
(column Y)
DNT
a1
a2
a3
a4
a5
a1
14%
-
a2
16%
11.2%
-
a3
20%
14.2%
11%
-
a4
13%
15%
9%
28.8%
-
a5
18%
19.1%
12%
20%
12.2%
Explanation / Answer
The incremental rate of return method is a method in which the differential IRR is determined using the difference of higher investment and lower investment projects. If the difference is higher than MARR then the higher investment project is accepted. If the difference is lower than MARR then lower investment projects is chosen.
Projects in order of investment
A5 is highest $500
A4 with $400
A3 with $300
A2 with $200
A1 with $100
The matrix gives the differential IRRs
The MARR is 12%
A5 is superior to all projects as the differentail IRR is greater than the ARR for all cases and thus the Higher investment projects are considered.
A4 is superior only to A1 and A3
A3 is superior to A1
A1 is superior to A2
thus project A5 should be chosen as it is superior to all
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