Use Rate of Return Analysis to determine whether Alternative A or Bshould be chosen. Assume the MARR is 6% per year, compoundedannually.Initial CostAnnual BenefitSalvage ValueUseful Life (yrs)Alternative A70017005Alternative B118927005Alternative B should be chosen, because the incremental rate of return ofB-A is 0.75%, which is less than the MARRAlternative B should be selected because its rate of return is 4.39%, whichis less than the MARRAlternative A should be selected because its rate of return is 6.84%, whichis greater than the MARRAlternative A should be chosen, because the incremental rate of return ofB-A is 0.75%, which is less than the MARR

the decision must be taken to pick which project must be picked, Look alternate A, Initial cost…

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Business

Finance

170

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter5: The Time Value Of Money

Section: Chapter Questions

Problem 13P

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Question

Use Rate of Return Analysis to determine whether Alternative A or B
should be chosen. Assume the MARR is 6% per year, compounded
annually.
Initial Cost
Annual Benefit
Salvage Value
Useful Life (yrs)
Alternative A
700
170
0
5
Alternative B
1189
270
0
5
Alternative B should be chosen, because the incremental rate of return of
B-A is 0.75%, which is less than the MARR
Alternative B should be selected because its rate of return is 4.39%, which
is less than the MARR
Alternative A should be selected because its rate of return is 6.84%, which
is greater than the MARR
Alternative A should be chosen, because the incremental rate of return of
B-A is 0.75%, which is less than the MARR

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Step 1: Here MARR of both projects A and B must be found out and then

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Step 2: Now look at the project B

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Step 3: Look difference in Project A and Project B

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