Deck 8: Choosing the Best Alternative

Question 1

Case Study 8
The cash flows for three mutually exclusive alternatives are given in table below. MARR = 4%.
$$\begin{array} { | l | l | l | l | } \hline & \text { Alt. A } & \text { Alt. B } & \text { Alt. C } \\\hline \text { Initial cost } & \$ 15,000 & 27,000 & 24,000 \\\hline \text { Annual benefits } & \$ 4,500 & 7,600 & 6,500 \\\hline \text { RoR } & 15 \% & 13 \% & 11 \% \\\hline \text { Life in years } & & { 5 } \\\hline\end{array}$$

-?RoR for the first increment (Alt. C-Alt. A) is ___________________.

A) 3.36%
B) 3.09%
C) 2.85%
D) 3.62%

Answer 1

3.62%

Question 2

Case Study 8
The cash flows for three mutually exclusive alternatives are given in table below. MARR = 4%.
$$\begin{array} { | l | l | l | l | } \hline & \text { Alt. A } & \text { Alt. B } & \text { Alt. C } \\\hline \text { Initial cost } & \$ 15,000 & 27,000 & 24,000 \\\hline \text { Annual benefits } & \$ 4,500 & 7,600 & 6,500 \\\hline \text { RoR } & 15 \% & 13 \% & 11 \% \\\hline \text { Life in years } & & { 5 } \\\hline\end{array}$$

-Determine the ?RoR for the second increment (Alt. B - Alt.A) if A was retained during the first incremental analysis. ___________________.

A) 10.85%
B) 8.12%
C) 9.19%
D) 5.78%

Answer 2

9.19%

Question 3

Case Study 8
The cash flows for three mutually exclusive alternatives are given in table below. MARR = 4%.
$$\begin{array} { | l | l | l | l | } \hline & \text { Alt. A } & \text { Alt. B } & \text { Alt. C } \\\hline \text { Initial cost } & \$ 15,000 & 27,000 & 24,000 \\\hline \text { Annual benefits } & \$ 4,500 & 7,600 & 6,500 \\\hline \text { RoR } & 15 \% & 13 \% & 11 \% \\\hline \text { Life in years } & & { 5 } \\\hline\end{array}$$

-The best alternative for a MARR of 4.0% using the incremental rate of return analysis is ____________.

A) Alt. C
B) Alt. A
C) Alt. B
D) Do nothing

Answer 3

Alt. B

Question 4

Table 8.1
Cash flows related to three mutually exclusive capital equipment projects are given in table below.
$$\begin{array} { | l | l | l | } \hline \text { Altermative } & \text { Iritial Cost } & \text { Computed ROR } \\\hline \text { A } & \$ 100,000 & 18 \% \\\hline \mathrm { B } & \$ 200,000 & 15 \% \\\hline \mathrm { C } & \$ 300,000 & 13 \% \\\hline\end{array}$$

-?RoR for the first increment (alt.B - alt.A) is ___________.

A) 10.2%
B) 12%
C) 14.67%
D) 15.5%

Question 5

Table 8.1
Cash flows related to three mutually exclusive capital equipment projects are given in table below.
$$\begin{array} { | l | l | l | } \hline \text { Altermative } & \text { Iritial Cost } & \text { Computed ROR } \\\hline \text { A } & \$ 100,000 & 18 \% \\\hline \mathrm { B } & \$ 200,000 & 15 \% \\\hline \mathrm { C } & \$ 300,000 & 13 \% \\\hline\end{array}$$

-?RoR for the second increment (C-B) is ___________.

A) 10.2%
B) 18.6%
C) 14.67%
D) 9.0%

Question 6

Table 8.1
Cash flows related to three mutually exclusive capital equipment projects are given in table below.
$$\begin{array} { | l | l | l | } \hline \text { Altermative } & \text { Iritial Cost } & \text { Computed ROR } \\\hline \text { A } & \$ 100,000 & 18 \% \\\hline \mathrm { B } & \$ 200,000 & 15 \% \\\hline \mathrm { C } & \$ 300,000 & 13 \% \\\hline\end{array}$$

-?RoR for the increment (C- A) is ___________

A) 12.3%
B) 10.5%
C) 14.67%
D) 15.5%

Question 7

Table 8.1
Cash flows related to three mutually exclusive capital equipment projects are given in table below.
$$\begin{array} { | l | l | l | } \hline \text { Altermative } & \text { Iritial Cost } & \text { Computed ROR } \\\hline \text { A } & \$ 100,000 & 18 \% \\\hline \mathrm { B } & \$ 200,000 & 15 \% \\\hline \mathrm { C } & \$ 300,000 & 13 \% \\\hline\end{array}$$

-Based on ?ROR analysis, the best alternative , for a MARR of =10%, is _________________.

A) Alt.A
B) Alt.B
C) Alt. C
D) Do nothing

Question 8

The cash flows for four mutually exclusive alternatives are provided in the table below.
If the useful life is 10 years for each alternative, find the best alternative using incremental rate of return analysis. MARR = 10%
$$\begin{array} { | l | l | l | l | l | } \hline & \text { P } & \text { Q } & R & \mathrm {~S} \\\hline \text { Iritial Cost } & 19,000 & 16,000 & 11,000 & 8,500 \\\hline \text { EUAB } & 3,500 & 3,100 & 2,200 & 1,350 \\\hline\end{array}$$

A) Alt. P
B) Alt. Q
C) Alt. R
D) Alt. S

Question 9

Given the financial data for four mutually exclusive alternatives in the table below, determine the best alternative using the incremental rate of return (?RoR) analysis. MARR =10%.
$$\begin{array} { | l | l | l | l | l | } \hline & \text { A } & \text { B } & \text { C } & \text { D } \\\hline \text { First cost } & \$ 15,000 & \$ 36,000 & \$ 21,200 & 45,000 \\\hline \text { O \&M Cost/year } & 1,600 & 400 & 900 & 1,000 \\\hline \text { Benefit/year } & 8,000 & 13,000 & 9,000 & 15,000 \\\hline \text { Salvage value } & 3,000 & 6,000 & 4,600 & 10,000 \\\hline \text { Life in years } &&& { 4 } \\\hline\end{array}$$

A) Alt. A
B) Alt. B
C) Alt. C
D) Alt. D

Question 10

Table 8.2 Given the financial data for three alternatives, find:
$$\begin{array} { | l | l | l | l | } \hline & \text { A } & \mathrm { B } & \mathrm { C } \\\hline \text { Initial cost } & \$ 600 & \$ 1,200 & \$ 400 \\\hline \text { EUAB } & \mathbf { 8 2 } & 196 & 70 \\\hline \text { LiFe } && 10 Years \\\hline \text { RoR } & 6.1 \% & 10.1 \% & 11.7 \% \\\hline\end{array}$$ MARR = 8%
?RoR (B-C) = 9.2%

-The most attractive alternative for a MARR of 8% is Alt. C.

Question 11

Table 8.2 Given the financial data for three alternatives, find:
$$\begin{array} { | l | l | l | l | } \hline & \text { A } & \mathrm { B } & \mathrm { C } \\\hline \text { Initial cost } & \$ 600 & \$ 1,200 & \$ 400 \\\hline \text { EUAB } & \mathbf { 8 2 } & 196 & 70 \\\hline \text { LiFe } && 10 Years \\\hline \text { RoR } & 6.1 \% & 10.1 \% & 11.7 \% \\\hline\end{array}$$ MARR = 8%
?RoR (B-C) = 9.2%

-For a MARR of 11 %, the most attractive is Alt. C.

Question 12

Table 8.2 Given the financial data for three alternatives, find:
$$\begin{array} { | l | l | l | l | } \hline & \text { A } & \mathrm { B } & \mathrm { C } \\\hline \text { Initial cost } & \$ 600 & \$ 1,200 & \$ 400 \\\hline \text { EUAB } & \mathbf { 8 2 } & 196 & 70 \\\hline \text { LiFe } && 10 Years \\\hline \text { RoR } & 6.1 \% & 10.1 \% & 11.7 \% \\\hline\end{array}$$ MARR = 8%
?RoR (B-C) = 9.2%

-For a MARR of over 11.7% the best alternative is "Do nothing."