A chemical engineer working for a large chemical products company was asked to m

Question

A chemical engineer working for a large chemical products company was asked to make a recommendation about which of 3 mutually exclusive revenue alternatives should be selected for improving the marketability of personal care products used for conditioning hair, cleansing skin, removing wrinkles, etc. The alternatives (X, Y and Z) were ranked in order of increasing initial investment and then compared by incremental rate of return analysis. The rate of return on each increment of investment was less than the company’s MARR of 17% per year. The alternative to select is:

Explanation / Answer

In business MARR- the minimum acceptable rate of return,, or hurdle rate is the minimum rate of return on a project a company is willing to accept before starting a project, given its risk and the opportunity cost of forgoing other projects.

Since all 3 alternatives X, Y, Z are giving returns less than MARR we cannot select any project.

For any of them to be selected their return should have been greater than 17% i, e, MARR

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