Question

For the four revenue alternatives below, use the ROR method results to answer the question below

Alternative	Initial Investment, $	Overall ROR, i*%	Δi*% When Compared with Alternative
			A	B	C
A	−60,000	11.7	-	-	-
B	−90,000	22.2	43.3	-	-
C	−140,000	17.9	22.5	10.0	-
D	−190,000	15.8	17.8	10.0	10.0

Problem 08.034.c- Choose from more than two alternatives based on incremental ROR analysis

Which one should be selected if the MARR is 10% per year and the alternatives are mutually exclusive?

Answer 1

First we need to arrange the data in the increasing order of initial investment as below,

Alternative	Initial Investment, $	Overall ROR, i*%
A	-60,000	11.7
B	-90,000	22.2
C	-1,40,000	17.9
D	-1,90,000	15.8

1. Alt A becomes base to compare with Alt B and find the difference of ROR, =(22.2-11.7)=10.5
2. Since 10.5 is greater than MARR of 10%, Alt A needs to be dropped and Alt B become base to compare
3. Find difference between Alt C-Alt B = (17.9-22.2) = 4.3 which is less than 10 hence reject Alt C
4. Find difference between Alt D-Alt B = (15.8-22.2) = 6.4 which is less than 10 hence reject Alt D

Hence select Alternative B based onn ROR