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 investments Individual ROR Rate ofReturn.% Incremental RoR, %, when compared with alternative V WX YZ Alternative - 27.3 19.4 35.3 25.0 -25,000 35,000 40,000 -60,000 -75,000 9.6 15.1 13.4 25.4 20.2 - 0.0 38.5 24.4 -46.5 27.3 .6.8 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 lfalternatives Wand Y are mutually exclusive and MARR-16% per year, which one of the two alternatives is preferable? s ateratve WB. altenative x C. both are equally good D. neither one is good B. alternative X Alternative W is contingent on Y; and V, X, Y, Z are independent; which alternative (s) should be selected if MARR = 14% per year,? A. only Y 5). B. Y and w C. W, Y and Z D. W.X, Y and Z Note: Questions 3-s could apply to Benefit/Cost ratios. In that case, ROR figures in the table (2) would be one order of magnitude lower; that is, one-tenth. MARR hos

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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