ven the following time events and incremental cash flow, if the MARR is 16% per

Question

ven the following time events and incremental cash flow, if the MARR is 16% per year, which alternative should be selected on the basis of rate of return? Assume alternative B requires the extra $10,000 initial investment. (You can use Excel).

Question 10 options:

The "Incremental ROR" is less than MARR, so select alternative A.

The "Incremental ROR" is more than MARR, so select alternative B.

The "Incremental ROR" is more than MARR, so select alternative A.

Select neither A nor B and go with "DN"

Year Incremental CFB-CFA 0 -10,000 1 +2,500 2 +2,500 3 +2,500 4 +2,500 5 +5,000

Explanation / Answer

Option 1

Incremental NPV=-10000+2500/(1+r)+2500/(1+r)^2+2500/(1+r)^3+2500/(1+r)^4+5000/(1+r)^5

Incremental rate of return is the return at which NPV=0

So, 0=-10000+2500/(1+r)+2500/(1+r)^2+2500/(1+r)^3+2500/(1+r)^4+5000/(1+r)^5

So, r=13.55%

Incremental rate of return=13.55%

As Incremental rate of return is less than MARR of 16%, we should reject incremental project i.e.,B-A

Hence, Accept A-B

Hence, Accept A

Related Questions

Navigate

• Browse (All)
• Browse V
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.