2). The five alternatives are being evaluated by the rate of return method, usin

Question

2). The five alternatives are being evaluated by the rate of return method, using the following information: Initial investment. $ Individual RoR Rate of Return,% Incremental RoRN6, when compared with alternative V W XY Z Alternative -25,000 -35,000 -40,000 60,000 9.6 15.1 13.4 25.4 20.2 27.3 19.4 35.3 25.0 - 0.0 38.5 24.4 - 46.5 27.3 Z -75,000 If the alternatives are independent and MARR-20% per year, which alternative (s) should be selected? A. W, Y and Z B. Y and Z C. Y only D. None of the preceding If alternatives w and Y are mutually exclusive and MARR-16% per year, which one ofthe two alternatives is preferable? A. alternative W 4) B. alternative X C. both are equally good D. neither one is good 5). Alternative W is contingent on Y; and V, X, Y, Z are independent; which alternative (s) should be selected if MARR = 1 4% per year? A. only Y B. Y and VW C. W, Y and Z D. W, X, Y and Z

Explanation / Answer

4

Option A

We prefer those projects whose incremental RoR is greater than or equal to MARR
From the Incremental RoR table, we see W is preferrable over Y as its incremental RoR of 38.5% is greater than MARR of 16%

5

Option D

We will only consider W,X,Y,Z as these are the only projects with IRR greater than MARR

So, we can select X,Y,Z as they are independent. Now, as Y has been chosen we can select W as well. So, W,X,Y,Z

Using the above rule, we can rank the projects in descending order of preferrability

X
W
Z
Y

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