Rate of Return Analysis

Short cuts in incremental rate of return analysis

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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

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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

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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

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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

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