Money is required for an expansion. A company decides to borrow $18,363 from a bank at 13% interest; sell $27,111 in stocks at 8% interest; sell $48,311 in stocks at 17% interest; and $42,138 in reinvestment from last years profits which could have otherwise been drawing 4% interest.
The MARR for this expansion should exceed ________ %
The answer is 10.63% But I'm not sure how exactly, however I know I need to use a weighted average cost method.
I appreciate any help.
Oct 7th 2012, 06:53 PM
Re: MARR help.
Assuming a monthly compounded interest rate for each cash flow, I consider each amount as Pv and calculate Fv for 1 year...then find total Pv and Fv and solve for MARR that I find MARR=10.77%
Oct 9th 2012, 10:34 AM
Re: MARR help.
Assuming there are no tax shields from the interest bearing loan(s), I'm pretty sure the indifference point simply becomes the weighted average required return (cost of capital) of all the "loans"
What I did is sum the total capital required (18363+27111+48311+42138= $135,923), then found the fraction of total capital each loan accounts for
18363/135923=0.1351 and then multiplied that by the interest for that loan (0.1351*0.13 = 0.01756)
When you do that for all 4 loans and add it together, you get 0.1060, which is very close to what you say the answer is, which is likely due to my rounding error.
I just ran it in excel and without rounding I get a MARR of 0.106343003 which is 10.63%. :)