Question

When an incremental rate of return analysis is conducted correctly, the alternative identified as best by the present worth method will also be identified as best by the incremental ROR analysis.
Question 7 options:

True
False

Answer 1

Answer:

Yes it is True that correct Incremental Rate of Return Analysis identifies the best alternative that will be reflected on the incremental ROR analysis

Explanation:

The incremental internal rate of return is an analysis of the financial return to an investor or entity where there are two competing investment opportunities involving different amounts of investment. This analysis is applied to the difference between the costs of the two investments

Based just on quantitative analysis, you would select the more expensive investment opportunity if it has an incremental internal rate of return higher than the minimum return you consider acceptable. However, there are qualitative issues to consider as well, such as whether there is an incremental increase in risk associated with the more expensive investment. Therefore, realistically, the investor must weigh a variety of factors besides just the incremental internal rate of return before making an investment decision. This rate of return may not even be the deciding factor in making an investment decision.

Answer 2

Answer: True

Explanation: The incremental internal rate of return is the analysis of the financial return on what investment an investor or entity can invest in when two or more competing investment opportunities are involved.

When comparing two or more alternatives, the alternative with the highest rate of return is not necessarily the alternative that maximizes profit at the minimum acceptable rate of return.

During the selection process, if the incremental rate of return is greater than or equal to the minimum acceptable rate of return, then the more costly alternative is selected and this is continued until all alternatives have been considered.