Answered: Does the MARR represent a market…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Does the MARR represent a market interest rate?

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Introduction:

Market interest rate:

It refers to the rate that prevails in the market on deposits and loans. The market interest rate includes both real rate of return and inflation rate. It is also known as the opportunity cost of capital.

Minimum Attractive Rate of Return (MARR):

It means the minimum rate that is accepted by a person, an institution, or a company to accept the financial burden for taking a project or investment. While calculating the MARR following factors are considered:

Risk-free real return: it is the return that could have been earned by not taking this project and depositing the amount in the bank.
Inflation factor: it is also considered while calculating the MARR to maintain the real value of the amount invested.
Risk premium: it refers to the compensation for taking the risk by investing an amount in a particular project. If the risk is high, then the premium is also high and vice-versa.

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