Rate of Return Analysis

A chemical engineer working for a large chemical products company was asked to make a recommendation about which of three mutually exclusive revenue alternatives should be selected for improving the marketability of personal care products used for conditioning hair, cleansing skin, removing wrinkles, etc. The alternatives (X, Y, and Z) were ranked in order of increasing initial investment and then compared by incremental rate of return analysis. The rate of return on each increment of investment was less than the company’s MARR of 17% per year. The alternative to select is

• a. DN.

• b. Alternative X.

• c. Alternative Y.

• d. Alternative Z.

When the net cash flow for an alternative changes signs only once, the cash flow is said to be...

• a. conventional.

• b. simple.

• c. nonconventional.

• d. either (a) or (b).

Norstrom’s criterion states that a unique nonnegative value exists if

• a. the net cash flow series starts negatively and changes sign only once.

• b. the cumulative cash flow series starts negatively and changes sign only once.

• c. the net cash flow and cumulative cash flow series change sign only once.

• d. none of the above.

In keeping with the increasingly popular merchandising theme of customization, an entrepreneurial engineer started a business making customized bobblehead dolls. He entered into a contract with Binkely Toys, Inc., the maker of the dolls, to purchase bobbleheads in lots of 250 for $2500. If the engineer’s initial investment was $50,000 and his profit was $30,000 in year 1 and $38,000 in year 2, his rate of return was closest to

• a. <15%.

• b. 22%.

• c. 29%.

• d. 36%.

When the reinvestment rate is lower than the i* rate of return, the composite rate of return will be

• a. lower than the composite rate.

• b. lower than the i* rate.

• c. higher than the i* rate.

• d. equal to the composite rate.

The cash flow for one of the product lines of Hardy Instruments, a manufacturer of electronic components, is shown. The number of possible rate of return values according to the cash flow rule of signs is

• a. one

• b. two

• c. three

• d. four

Jewel-Osco evaluated three different pay-by-touch systems that identify customers by a finger scan and then deduct the amount of the bill directly from their checking accounts. The alternatives were ranked according to increasing initial investment cost and identified as Alternatives A, B, and C. Based on the incremental rates of return shown and the company’s MARR of 16% per year, the alternative that should be selected is

• a. Alternative A.

• b. Alternative B.

• c. Alternative C.

• d. Alternative DN.

For the cash flows shown, the correct equation to determine the composite rate of return for a reinvestment rate of 12% per year is

• a. 0 = {[5000 - 10,000(1 + i')](1+ i')} + 8000

• b. 0 = {[5000 - 10,000(1 + i')](1+ i')} + 8000

• c. 0 = {[5000(1+ 0.12) - 10,000](1+ i')} + 8000

• c. 0 = {[5000(1+ i') - 10,000](1+ i')} + 8000

For the cash flows shown, the correct equation for F₂ at the reinvestment rate of 20% per year is

• a. [10,000(1+ i') + 6000](1.20) - 8000

• b. [10,000(1.20) + 6000(1+ i')](1.20) - 8000

• c. [10,000(1.20) + 6000](1.20) - 8000

• c. [10,000(1.20) + 6000](1+i') - 8000