A total of $50,000 was allocated to a project to detect and reduce insider theft in the ZipCar auto parts store. Two alternatives identified as Y and Z are under consideration. The overall ROR on the $50,000 is expected to be 40%, with the rate of return on the $20,000 increment between Y and Z at 15% per year. If Z is the higher first-cost alternative, (a) what is the size of the investment required in Y, and (b) what is the rate of return on Y?
What will be an ideal response?
(a) Size of investment in Y = 50,000 – 20,000 = $30,000
(b) 30,000(i*) + 20,000(0.15) = 50,000(0.40)
i* = 0.567 (56.7%)
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