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## Short cuts in incremental rate of return analysis

### Rate of Return Analysis

#### Short cuts in incremental rate of return analysis

Go to questions covering topic below

Three short cuts may reduce the computational burden of incremental ROR analysis. They are:

1. Eliminate the do-nothing alternative if at least one other alternative has a ROR greater than or equal to the MARR.
2. Eliminate any alternative that has a ROR < MARR.
3. Eliminate any alternative that is dominated by another. X dominates Y if the initial cost of X is greater than or equal to the initial cost of Y, and if the ROR of X is greater than or equal to the ROR of Y.

Example: Suppose that alternatives X, Y and Z are being considered by an investor with a MARR of 15%. The do-nothing alternative is also an option. Apply short cuts to determine which alternatives can be eliminated before performing incremental ROR analysis.

 Alternative Initial cost (\$k) ROR (%) X 30 18 Y 25 16 Z 40 12
1. Eliminate the do-nothing alternative because the ROR for another alternative > MARR.
2. Eliminate Z because its ROR < MARR.
3. Eliminate Y because it is dominated by X.

By applying short cuts, all alternatives except X have been eliminated and there is no need to perform the incremental ROR analysis.

Select X.

### Rate of Return Analysis

#### Short cuts in incremental rate of return analysis

Question 1

Question 2

Question 3

Question 1.

Consider the five investment alternatives described below. Which alternatives can be eliminated from an incremental ROR analysis by applying short cuts for an investor with a MARR of 10%? Each alternative has a 5-year life and no salvage value.

 Alternative Initial cost (\$k) ROR (%) A 60 8 B 45 15 C 50 18 D 30 20 E 75 12

Choose an answer by clicking on one of the letters below, or click on "Review topic" if needed.

A Can eliminate do-nothing, A and B

B Can eliminate do-nothing and E

C Can eliminate do-nothing, A and E

D Can eliminate do-nothing, B and E

Review topic

Question 2.

Consider the five investment alternatives described below. Which alternatives can be eliminated from an incremental ROR analysis by applying short cuts for an investor with a MARR of 10%? Each alternative has a 5-year life and no salvage value.

 Alternative Initial cost (\$k) ROR (%) A 60 14 B 45 20 C 50 18 D 30 25 E 75 12

Choose an answer by clicking on one of the letters below, or click on "Review topic" if needed.

A Can eliminate do-nothing and C

B Can eliminate do-nothing and A

C Can eliminate do-nothing and E

D Can eliminate do-nothing only

Review topic

Question 3.

Consider the five investment alternatives described below. Which alternatives can be eliminated from an incremental ROR analysis by applying short cuts for an investor with a MARR of 20%? Each alternative has a 5-year life and no salvage value.

 Alternative Initial cost (\$k) ROR (%) A 60 14 B 45 15 C 50 18 D 30 16 E 75 15

Choose an answer by clicking on one of the letters below, or click on "Review topic" if needed.

A Can eliminate do-nothing and A

B Can eliminate do-nothing, A and E

C Can eliminate all except do-nothing. Select do-nothing

D Can eliminate do-nothing, A, B and E

Review topic