Rate of Return
Rate of return measures profit relative to invested capital. In project selection, compare ROR with MARR.
$$ROR=\frac{\text{Net income}}{\text{Capital}}$$
Rate of return measures profit relative to invested capital. In project selection, compare ROR with MARR.
A proposed plant requires fixed capital P8 M and working capital P1.5 M. Annual profit is P2 M and depreciation is 8% of fixed capital. Compute rate of return.
Final answer: 14.32%.
Project A costs $100,000 and returns $23,000/year for 9 years. Project B costs $100,000 and returns $35,000/year for 4 years. MARR is 16%. Which is acceptable?
Project A gives ROR about $17.7\%$, greater than MARR. Project B gives ROR about $15\%$, less than MARR.
Final answer: Project A is acceptable.
Five machine sizes are available with different initial costs, revenues, and RORs. With budget $250,000 and MARR 15%, which should be selected?
Eliminate options with ROR below MARR or above budget. Incremental comparison shows Deluxe over Regular has incremental ROR $16.67\%>15\%$.
Final answer: select Deluxe.