Question

when conducting incremental analysis, what step must always be taken immediately prior to beginning the pairwise comparisons?

Answer 1

When comparing two or more alternatives, the alternative with the highest ROR is not necessarily the alternative that maximizes profit at the MARR, which is the appropriate goal. For example, suppose that an investor with at least $1,000 available to invest is considering two mutually exclusive investment alternatives, X and Y, as follows:

Alternative X (ROR = 100%)

EOY NCF ($)

0 - 10

1 + 20

Alternative Y (ROR = 75%)

EOY NCF ($)

0 - 1000

1 + 1750

Despite having a lower ROR than alternative X, alternative Y is obviously the superior investment at any reasonable MARR because it generates more profit than X. Alternatives cannot be evaluated solely by comparing their individual ROR values. Comparisons must be made incrementally.