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## Decision criteria

### Rate of Return Analysis

#### Rate of return analysis decision criteria

Go to questions covering topic below

Notation: ROR = rate of return of a cash flow (sometimes denoted i* )

ROR is the interest rate that results in equivalent benefits equal to equivalent costs.

One of two decision criteria should be used when performing rate of return analysis, as follows:

 Condition Appropriate Criterion Only one investment alternative is under consideration Invest in the alternative if its ROR is greater than or equal to the MARR. Otherwise do not invest in the alternative. Two or more investment alternatives are under consideration Perform incremental ROR analysis. At each step, choose the higher cost alternative if the incremental ROR is greater than or equal to the MARR. Otherwise choose the lower cost alternative.

Example: An investment proposal is presented to an investor with a MARR of 15%. The ROR of the investment is 27.1%. Should the investor accept the proposal and make the investment?

Yes, the proposal should be accepted because ROR = 27.1% > MARR = 15%.

### Rate of Return Analysis

#### Rate of return analysis decision criteria

There is onlyone question here; issues related to incremental analysis will be covered later in this chapter.

Question 1

Return to Rate of return analysis decision criteria

Question 1.

An investor with a MARR of 20% has been asked to invest in a project that has an expected rate of return (ROR) of 15%. Should the investor invest in this project?

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

A Yes, because MARR < ROR

B No, because MARR < ROR

C Yes, because ROR < MARR

D No, because ROR < MARR

Review topic