Question

Problem 1. A) Determine the MARR for a company that can invest excess funds at 6% and requires 7% profit margin. B) What if, instead, the company borrows funds at 9%?

Answer 1

Ans. A)

1) MARR - Minimum acceptable rate of return. 2) It is also known as hurdle rate. 3) A firm analyzes its investment in new projects or capital expenditureby comparing its Internal Rate of Return (IRR) to its MARR. 4) For most corporates the MARR is their Weighted Average Cost of Capital (WACC). 5) In this case the cost of excess funds can be taken as MARR = 6%. The required IRR is the required profit margin = 7%. The company can accept this project.

B) 1) If the company borrows at 9% then WACC = 9% = MARR. At the same expected IRR at 7% the project will be unacceptable.