Discussion
Two alternatives have internal rates of return of 22 and 16 per cent, and the increment between them earns 13 per cent. At a minimum attractive rate of 10 per cent the choice is
Answer: D
Correct answer: the dearer alternative, the increment earning above 10 per cent
The individual rates of 22 and 16 per cent are not the criterion. The question is whether the extra money spent on the dearer alternative earns its keep, and at 13 per cent against a requirement of 10 it does. The dearer alternative is chosen even though its own rate of return is the lower of the two.
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