FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN: 9781259964947
Author: Libby
Publisher: MCG
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The answer is project B but please answer why that is the correct answer. Engineering economic question

**Rate of Return Analysis for Projects A, B, and C**

You are in the process of using Rate of Return analysis to evaluate three mutually exclusive projects: A, B, and C.

Below is a table with the key cash flow parameters for each option, the Internal Rate of Return (IRR) for each option, as well as the incremental cash flows and rates of return.

| Year | A      | B      | C      |
|------|--------|--------|--------|
| 0    | $(1,900) | $(2,000) | $(3,000) |
| 1    | $750   | $700   | $1,250 |
| 2    | $750   | $900   | $1,300 |
| 3    | $1,000 | $1,100 | $1,325 |

**IRR:**

- A: 14.3%
- B: 15.3%
- C: 13.8%

**Incremental Cash Flows:**

|      | B-A    | C-A    | C-B    |
|------|--------|--------|--------|
| 0    | $(100) | $(1,100) | $(1,000) |
| 1    | $(50)  | $500   | $550   |
| 2    | $150   | $550   | $400   |
| 3    | $100   | $325   | $225   |

**Incremental IRR:**

- B-A: 28.1%
- C-A: 12.9%
- C-B: 10.0%

**Decision Criteria:**

If your Minimum Acceptable Rate of Return (MARR) is 14.0%, which option should you choose?

a) A  
b) B  
c) C  
d) Do nothing  

**Analysis:**

To make a decision, compare each project's IRR and incremental IRR with the MARR. The ideal project should have an IRR greater than the MARR, and any incremental investment should generate additional returns above the MARR.
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Transcribed Image Text:**Rate of Return Analysis for Projects A, B, and C** You are in the process of using Rate of Return analysis to evaluate three mutually exclusive projects: A, B, and C. Below is a table with the key cash flow parameters for each option, the Internal Rate of Return (IRR) for each option, as well as the incremental cash flows and rates of return. | Year | A | B | C | |------|--------|--------|--------| | 0 | $(1,900) | $(2,000) | $(3,000) | | 1 | $750 | $700 | $1,250 | | 2 | $750 | $900 | $1,300 | | 3 | $1,000 | $1,100 | $1,325 | **IRR:** - A: 14.3% - B: 15.3% - C: 13.8% **Incremental Cash Flows:** | | B-A | C-A | C-B | |------|--------|--------|--------| | 0 | $(100) | $(1,100) | $(1,000) | | 1 | $(50) | $500 | $550 | | 2 | $150 | $550 | $400 | | 3 | $100 | $325 | $225 | **Incremental IRR:** - B-A: 28.1% - C-A: 12.9% - C-B: 10.0% **Decision Criteria:** If your Minimum Acceptable Rate of Return (MARR) is 14.0%, which option should you choose? a) A b) B c) C d) Do nothing **Analysis:** To make a decision, compare each project's IRR and incremental IRR with the MARR. The ideal project should have an IRR greater than the MARR, and any incremental investment should generate additional returns above the MARR.
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