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Discussion

In incremental analysis, an increment whose rate of return exceeds the minimum attractive rate means

  • A.both alternatives should be rejected
  • B.the analysis must be repeated at a lower rate
  • C.the dearer alternative is preferred
  • D.the cheaper alternative is preferred

Answer: C

Correct answer: the dearer alternative is preferred

The extra money spent is itself earning more than the minimum attractive rate, so spending it is worthwhile even though the dearer alternative may show a lower overall rate of return. The dearer alternative then becomes the defender and is tested against the next one up.

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