The four revenue alternatives described below are being evaluated by the rate of

Question

The four revenue alternatives described below are being evaluated by the rate of return method. If the alternatives are mutually exclusive, which one(s) should be selected when the MARR is 10% per year?

Question 19 options:

Select only alternative C

Select alternatives A, B, C, and D

Select only alternative D

Select only alternative B

Alternative Initial Investment ($) Overall Rate of Return Incremental Rate of Return (%) When Compared with Alternative i* (%) A B C A -80,000 12 B -110,000 25 42 C -150,000 20 25 10 D -230,000 16 18 13 12

Explanation / Answer

If there is no limitation on the usage of funds or if the much funds are available for the selection of various alternatives, alternative B,C and D shall be selected. But according to the options given in the question, it is assumed that there is a limitation on the fund usage. Due to this reason Alternative B more beneficial because it gives maximum overall rate of return viz 25% and the incremental rate of return compared to Alternative A is 42% which is high and initial investment required for Alternative B relatively low compared to Alternative C and D (110000 Only) . Hence Alternative B shall be selected

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