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