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Alternative X costs 50 000 and returns 12 000 a year for 8 years; Y costs 70 000 and returns 15 500. The increment is 20 000 returning

  • A.27 500 a year for 8 years
  • B.3500 a year for 16 years
  • C.20 000 once after 8 years
  • D.3500 a year for 8 years

Answer: D

Correct answer: 3500 a year for 8 years

The increment is the difference between the two cash flows, term by term: a further 20,000 spent at the outset in exchange for a further \( 15{,}500 - 12{,}000 = 3{,}500 \) a year over the same eight years. The question to be asked of that increment is whether it alone earns the minimum attractive rate.

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