Question

Determine the incremental rate of return (ROR) value of the two alternatives below. Hint: Convert RoR value to a percentage. If the answer is 10%, enter 10. Do not enter 0.01. A B First Cost, $ 135,000 185,000 Operating Cost, $/year 9,000 5,200 Salvage value, $ 9,000 10,000 Life, n [infinity] [infinity]

Answer 1

Answer:m Incremental rate of return (ROR) = 0.076 ≈7.6%    

Explanation:

Given that;  

                                               A                            B

First Cost $                            135,000                 185,000

Operating Cost $/year           9,000                    5,200

Salvage value $                      9,000                     10,000

Life, n                                     [infinity ∞]                  [infinity ∞]

As alternatives have infinite life, salvage value will have no effect on calculations

Therefore;

Incremental initial cost (B-A) = 185000 - 135000 = 50000

Incremental annual cost (B-A) = 5200 - 9000 = -3800 (Annual savings)

Present worth of infinite annuity = A / i

Incremental rate of return ROR = 3800 / 50000 = 0.076 ≈7.6%