# Minimum attractive rate of return problem (MARR)

• May 9th 2011, 06:47 PM
testing12
Minimum attractive rate of return problem (MARR)
Hell everyone,

Im having some trouble with the following problem:

http://img594.imageshack.us/img594/8233/unledzh.jpg

I understand that minimal attractive rate of return is always greater then the cost of capital. What i do not follow in this question is the part where the capital funds are used to fund 25% of all capital projects and how I am supposed to calculate the MARR. (i know the MARR is the weighted average cost of capital, but im not sure how to calculate it)

I need some guidance for this problem, i would like to learn how to approach it.

• May 11th 2011, 01:14 PM
Carlow52
Company funds are costing 18% and they are putting up a 1/4 of the total

Bank funds then must make up the rest, at 10 %

so for every 100 dollars required to fund a project
25 are at 18% and 75 are at 10% so the average is
.....
• May 12th 2011, 06:53 PM
testing12
Hi there,

I calculated the MARR by:
(10% * 0.75)+ (18% * 0.25) = 12%

Therefore the projects above the 12% MARR should be kept and those below should be refused.

Is this the proper way to do this problem?
• May 13th 2011, 12:16 AM
Carlow52
100% !
Happy to point you in right direction.
The math you did creates the weighted averaged rate.

In comparison if the question asked for a simple averaged rate it would be 14%

In passing it is worth some reflection on why the Company rate is 18% and the consequence of having, or not having, bank debt available.

Not a math question I know but one you should think about (Evilgrin)
• May 13th 2011, 04:43 AM
testing12
Great! Thank you sir!