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Among mutually exclusive alternatives, the one with the highest internal rate of return

  • A.is always the best choice
  • B.is best only if lives are equal
  • C.is best only if first costs are equal
  • D.is not necessarily the best choice

Answer: D

Correct answer: is not necessarily the best choice

The rate of return is a ratio and takes no account of scale. Earning 40 per cent on 10,000 adds less value than earning 18 per cent on 100,000 when the alternative use of money returns 10 per cent. Choosing between mutually exclusive alternatives therefore requires incremental analysis or a straight comparison of present worths.

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