Question

A local recreational centre offers a one-year membership for N1800 and a two-year membership for N2700. Memberships are paid in advance. What is the incremental rate of return (ii) Which membership should be chosen if the centre will be used for at least two years 15 Marks

Answer 1

Here the center is running 2 offers

1 year - 1800

2 year - 2700

Let's say I don't take the 2-year membership and I pay $ 1800 now and $1800 after a year for 2 years so total I will pay $3600.

Now suppose if I pay 2700 upfront for 2 years which is $900 incremental and I will get a discount of $900.

It means that $900 incremental payment now equates to $1800 paid after a year. which means that the incremental rate of return is 100%

Ans.1 Incremental rate of return is 100%

2.

If the centre is to be chosen for at least 2 years then there will be 2 scenarios

1. If by investing the excess money $900 I am getting the return in excess of 100% then I will go for the only 1-year membership

2. If by investing the excess money of $900 somewhere else I am getting return less than 100% then I will go for a 2-year membership.