Question

Compare two competing, mutually exclusive new machines that have only cost data given and tell which of the following statements is true regarding the present worth of the incremental investment at your investment interest rate.

a.) If it is greater than zero, we chose the alternative with the largest initial investment expense.

b.) The internal rate of return will always be equal to the investment rate of return.

c.) Neither machine is chosen if there is only cost data and the present worth is less than zero.

d.) If it is less then zero, we chose the alternative with the smallest initial investment expense.

Can you please give an explanation for the answer. Thank you.

Answer 1

Mutually exclusive machines cannot go hand in hand and the occurrence of one will suspend the other one. In this case, both the machines can't be chosen and the incremental investment considering the present worth of the machines is that none of the machines will be chosen if the worth of the machines is less than zero. If the worth of the machines is less than zero, then the investment will not be worthy.

If the interest rate is greater than zero, the alternative with less initial investment expense should be chosen.

The internal rate of return will be higher or lesser than the investment rate of return because the initial rate of return considers only the initial value and final value.

If the interest rate is less than zero, then it is better to choose the alternative with a high initial investment expense.

Answer: Option C