1. Why is an incremental analysis necessary when you are conducting a rate of return analysis for service alternatives?
2. If all of the incremental cash flows are negative, what is known about the rate of return on the incremental investment?
3. A small construction company has $100,000 set aside in a sinking fund to purchase new equipment. If $30,000 is invested at 30%, $20,000 at 25% and the remaining $50,000 at 20% per year, what is the overall rate of return on the entire $100,000?
A food processing company is considering two types of moisture analyzers. The company expects an infrared model to yield a rate of return of 18% per year. A more expensive microwave model will yield a rate of return of 23% per year.
If the company’s MARR is 18% per year, can you determine which model(s) should be purchased solely on the basis of the rate of return information provided if
(a) either one or both analyzers can be selected and
(b) only one can be selected? Why or why not?
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