09 minimum-attractive-rate-of-return
- 1. Minimum Attractive Rate of Return
- 2. SOURCES OF CAPITAL • There are four sources of capital available to a firm money generated from the operation of the firm borrowed money sale of mortgage bonds sale of capital stock.
- 3. Money Generated from the Operation of the Firm A major source of capital investment money is through the retention of profits resulting from the operation of the firm. Since only about half of the profits of industrial firms are paid out to stockholders, the half that is retained is an important source of funds for all purposes, including capital investments. In addition to profit, there is money generated in the business equal to the annual depreciation charges on existing capital assets if the firm is profitable. A profitable firm will generate money equal to its depreciation Charges plus its retained profits. Even a firm that earns zero profit will still generate money from operations equal to its depreciation charges
- 4. How to decide MARR Cost of Borrowed Money It is the interest rate at which money can be borrowed. Who will pay you loan. Loans may be obtained from banks Insurance companies oil-producing nations
- 5. Cost of Capital MARR is based on cost of capital. The general assumption concerning the cost of capital is that all the money the firm uses for investments is drawn from all the components of the overall capitalization of the firm
- 6. Example
- 8. Minimum Attractive Rate of Return (MARR) should be greater than 8.52%
- 9. What should be value of MARR Minimum attractive rate of return should be greater than cost of capital
- 11. Minimum Attractive Rate of Return (MARR) should be greater than 8.4%
- 12. SELECTIONOF A MINIMUM ATTRACTIVERATEOF RETURN
- 14. FIND INTERNAL RATE OF RETURN (IRR) OF EACH PROJECT
- 15. SORT THE PROJECT LIST ACCORDING TO IRR VALUE
- 16. NOW FIND CUMULATIVE FIRST COST OF ALL PROJECTS
- 17. SELECT PROJECTS BASED ON MAX INVESTMENT VALUE OF $ 800,000
- 18. SMALLEST MINIMUM ATTRACTIVE RATE OF RETURN IS 12.4%