Question

The following data related to two mutually exclusive projects are given. Which of the following statement is true about the incremental rate of return?

Alternative	Initial Investment	ROR
A	$40,000	23%
B	$10,000	18%

answer is The ROR is greater than 23% ( please show how did they get the answer )

A. The ∆RoR is less than 23%

B. The ∆RoR is greater than 23%

C. The ∆RoR is between 18% and 23%

D. Insufficient data

Answer 1

Calculation of amount of return from Alternative A
Amount of return	Initial investment*ROR
Amount of return	40000*23%
Amount of return	$9,200
Calculation of amount of return from Alternative B
Amount of return	Initial investment*ROR
Amount of return	10000*18%
Amount of return	$1,800
Formula to calculate incremental ROR
Incremental ROR	Incremental initial investment/Incremental amount of return
Incremental initial investment	30000	(40000-10000)
Incremental amount of return	$7,400	(9200-1800)
Incremental ROR	24.67%	7400/30000
Thus the incremental ROR is 24.67% which is greater than 23% and hence correct answer is option (B)