Question

5 Questions 4 through 7 are based on the following statement: 1 tually exclusive alternatives, A and B, are to be evaluated by the rate of return (ROR) method. The initial Investment for alternative B is greater than that of alternative A. If the overall ROR of alternative A is less than the MARR and the overall rate of return of alternative B is greater than the MARR, then: A) Alternative B should be compared incrementally to alternative A. B) Alternative B should be selected. C) The ROR on the increment of Investment between A and B is between the ROR on alternative A and the ROR of alternative B. D) Alternative A should be selected because it has a lower Initial investment cost. If the overall ROR of both alternatives, A and B, is greater than the MARR, then: A) Select alternative A because it has a lower Initial investment cost. B) Select alternative B because it has a higher Initial investment cost, C) Conduct an incremental analysis and select A if the ROR on the increment exceeds the MARR. D) Conduct an incremental analysis and select By the ROR on the increment exceeds the MARR. I f the overall ROR of both alternatives, A and B, is greater than the MARR and the ROR of B is greater than that of A, then: A) Select alternative B, even without an incremental analysis. 9B) The ROR on the increment between A and B exceeds the MARR. C) The ROR on the Increment between A and B exceeds the overall rate of return for alternative A D) All of the above. If the overall ROR for alternative A exceeds the MARR and the ROR for alternative B is less than the MARR, then: 6 7 A) An incremental analysis is not necessary; select A B) The ROR on the increment between A and B is less than the MARR. C) The ROR on the increment between A and B is less than the overall rate of return on 8. D) All of the above. Questions 8 through 10 are based on the following information: Altacoative

Answer 1

4. The RoR of alternative B is greater than MARR and the RoR of alternative A is less than MARR. Thus, reject A and accept B.

B. Alternative B should be selected.

5. When both the alternatives RoR is greater than MARR then conduct an incremental analysis. The initial investment of A is less than B. Thus, assume alternative A as base alternative and determine the incremental cash flow between B and A, that is, ∆(B - A).

If the incremental ror of (B-A) is greater than MARR accept alternative B.

Option D.

6. D. All of the above.

7. Select A. Incremental analysis is not necessary.

Option A.

Alternative	Investment	RoR	A	B	C
A	-40,000	29
B	-75,000	15	1
C	-100,000	16	7	20
D	-200,000	14	10	13	12

8. MARR = 15%

D. Select option A, B and C.

9. MARR = 11%

∆RoR( B -A ) = 1% , Reject B and accept A.

∆RoR(C -A) = 7%, Reject C and accept A.

∆RoR(D -A) = 10%, Accept A and reject D.

Option B. Only A.

10. MARR = 10%

∆ RoR( B -A ) = 1% , Reject B and accept A.

∆RoR(C -A) = 7%, Reject C and accept A.

∆RoR(D -A) = 10%, Accept D and reject A.

Option D. Only D

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