Question

Problem:

A diagnostics laboratory is considering one of the following microscopes with digital recording and pattern detection software:

	Option A	Option B	Options C
Cost	$20,000	$30,000	$15,000
Savings	$1,199	$2,199	$1,000
IRR	6%	9%	7%

Each machine will have a 20-year life with no salvage value. There is a lot of debate within the company as to whether these devices are really going to last long, but they assume MARR of 10% as reasonable.

1. Which system do you recommend and why?
2. What is MARR? What is the formula to calculate it?

Answer 1

1) We have Minimum Acceptable rate of return on investment is 10%

Since IRR for all option is below MARR of 10%, none of the option should be selected.

2) MARR is Minimum Acceptable rate of return which project or assets should generate over its life. This is considered as minimum rate of return below which project can not be accepted. We can consider it as a hurdle rate while evaluating multiple projects where we should compare the IRR of various projects with MARR and select the one which has IRR greater than MARR.

There is no specific formula to MARR. It is the hurdle discount rate where NPV of the project zero.