Question

Determine the incremental rate of return (ROR) value of the two alternatives below.

	A	B
First Cost, $	-15,000	-25,000
Operating Cost, $/year	-1,600	-400
Salvage value, $	3,000	4,000
Life, n	2	4

		30.3%
		10.3%
		23.3%
		42.3%

Answer 1

Project	0	1	2	3	4	Salvage value
A	-15000	-1600	-1600	0	0	3000
B	-25000	-400	-400	-400	-400	4000
Incremental cash flows	-10000	1200	1200	-400	-400	1000

Now , -10000 = 1200/( 1 + IRR) + 1200/ ( 1 + IRR)^2 - 400/(1+IRR)^3 - 400 /( 1 +IRR)^4 + 1000/(1+IRR)^4

we will use Financial Calculator to find out the value of IRR

CF0	CF1	FR1	CF2	FR2	CF3	FR3	CF4	FR4	IRR<CPT
-10000	1200	1	1200	1	-400	1	600	1	44.42

Inremental rate of return = 44.42%