There are two mutually exclusive project, where the basic information is provide
ID: 1190711 • Letter: T
Question
There are two mutually exclusive project, where the basic information is provided below. Assume a DN alternative does not exist.
A
B
Initial Cost
$25,000
$35,000
Annual net profit
$6,000
$7,111.11
Useful Life
Infinity
Infinity
a) Using the incremental cost analysis, calculate the incremental rate of return for switching from project A to B?
b) Assuming MARR Is 10% per year, what would be your final decision?
c) If the DN exist, do your decision change? Why?
A
B
Initial Cost
$25,000
$35,000
Annual net profit
$6,000
$7,111.11
Useful Life
Infinity
Infinity
Explanation / Answer
a.) Projects are A & B. Incremental Cost Analysis :-
Change in Cost - $ 10,000 ($ 35,000 - 25,000)
Annual Net Profit - $ 1111.11 ($ 7,111.11 - $ 6,000).
Incremental rate of return - $ 1111.11 / $ 10,000
- 11.11 %
b.) MARR is 10 %, will go for switching to project B as its very close to 11.11 %.(1.11 % standard deviation).
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