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Math Help - Minimum attractive rate of return problem (MARR)

  1. #1
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    Minimum attractive rate of return problem (MARR)

    Hell everyone,

    Im having some trouble with the following problem:




    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.

    Thank you for your help.
    Last edited by testing12; May 10th 2011 at 02:47 PM.
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  2. #2
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    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
    .....
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  3. #3
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    Hi there,

    Thank you for your help.

    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?
    Thank you for your help.
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  4. #4
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    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
    Last edited by Carlow52; May 13th 2011 at 12:17 AM. Reason: typos
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  5. #5
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    Great! Thank you sir!
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