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
.....
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.
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.
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