A chemical engineer working for a large chemical products company was asked to m

Question

A chemical engineer working for a large chemical products company was asked to make a recommendation about which of three mutually exclusive revenue alternatives should be selected for improving the marketability of personal care products used for conditioning hair, cleansing skin, removing wrinkles, etc. The alternatives (X, Y, and Z) were ranked in order of increasing initial investmentand then compared by incremental rate of return analysis. The rate of return on each increment of investment was less than the company's MARR of 17% per year. The alternative to select is: (a) DN (b) Alternative X (c) Alternative Y (d) Alternative Z

Explanation / Answer

MARR or minimum acceptable rate of return is the lower limit of return set by a firm for investing in a project. Project is acceptable only if the rate of return is greater than or equals to MARR. Projects earning same as that of MARR are recommendable, since the money is earning at least as much as can be earned elsewhere. The project with rate of return less than MARR indicates that the money invested is returning less as compared to gain from somewhere else. Also investors may not be willing for such projects.

The projects were ranked in order of increased initial investment as X(I), Y(II), Z(III).

Rate of return on each increment of investment (for Y and Z) was less than company’s MARR.

Project X can be accepted among three projects X, Y and Z.

Hence option “(b) Alternative X” is correct answer

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