Five independent projects were ranked in decreasing order by two measures—rate of return (ROR) and present worth (PW)—to determine which should be funded with the total initial investment not to exceed $30 million. (a) Use the results below to determine the opportunity cost in ROR terms for each measure. (b) If a MARR of 15% per year is a firm requirement, how does the opportunity cost help in selecting projects to fund?
What will be an ideal response?
(a) ROR measure: Select projects A, E and C to total $21 million. Opportunity cost is 12.8%, the ROR of project B
PW measure: Select projects A, E, C and D to total $29 million. Opportunity cost is 12.8%, the ROR of project B
(b) Since 12.8% is less than a MARR of 15%, any project with ROR < 15% should be
eliminated initially. Projects B and D should not be considered.
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