Use Rate of Return Analysis to determine whether Alternative A or B should be ch

Question

Use Rate of Return Analysis to determine whether Alternative A or B should be chosen. Assume the MARR is 3% per year, compounded annually. Alternative B should be chosen, because the incremental rate of return of B-A is 0.75%, which is less than the MARR Alternative B should be selected because its rate of return is 2.82%, which is less than the MARR Alternative A should be chosen, because the incremental rate of return of B-A is 0.75%, which is less than the MARR Alternative A should be selected because its rate of return is 4.06%, which is greater than the MARR

Explanation / Answer

IRR of Alternative A (using financial calculator) = 4.06%
IRR of Alternative B (using financial calculator) = 2.82%

Thus,

Alternative A should be selected because its rate of return is 4.06%, which is higher than the MARR.

So ANSWER is Option 4.

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