Question

Which of the following analysis techniques require an incremental analysis for mutually exclusive projects?

Question options:

	Present Worth and Annual Worth
	IRR and Annual Worth
	Benefit-Cost and Present Worth
	IRR and Benefit-Cost

Answer 1

The answer is D) IRR and Benefit-Cost

The internal rate of return (IRR) is the discount rate for which the net present value of a project is zero. In other words, the sum of discounted costs is equal to the sum of discounted benefits when discounted by the IRR. This method is appropriate when there is only one alternative to the status quo. If the IRR is higher than the rate of return on alternative investments, then the project is a good investment. In some cases, a minimum rate of return is used to determine which projects should be implemented. As with the benefit-cost ratio, the IRR can be calculated directly or incrementally.