Unit 11: Setting the MARR

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BSS 310

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18 Terms

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MARR
Minimum Acceptable Rate of Return (also known as Hurdle Rate).
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Use of MARR
It’s the benchmark rate used to determine project viability.
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Factors influencing MARR
WACC, project cost, capital source, risk, market rate, planning horizon.
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Capital Structure
The mix of debt (loans, bonds) and equity (shares, retained earnings).
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Equity
Owner’s money, shares, retained earnings.
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Debt
Outsider’s money, loans, bonds with fixed returns.
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WACC
Weighted Average Cost of Capital, used in MARR determination.
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WACC Formula
Σ(weight of capital source × cost of that source).
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WACCequity
Weighted cost of equity financing (shares, retained earnings).
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WACCdebt
Weighted cost of debt financing (loans, bonds).
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Example - Nancy Botwin
Shows breakdown and WACC calculation using R17 million financing split.
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Example - Weintraub Electronics
WACC calculated with debt-equity ratio and various loan rates.
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Repo Rate
Interest rate at which the central bank lends to commercial banks (8.25%).
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Prime Lending Rate
Rate at which commercial banks lend to clients (11.75%).
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Inflation Rate
General increase in prices measured by CPI; affects purchasing power.
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Monthly Loan Repayment Formula
PMT = P[r/n] / (1 - (1 + r/n)^-nt)
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Excel Function for PMT
=PMT(rate, nper, pv, [fv], [type])
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Monthly Payment Components
Consist of principal and interest, but exclude taxes and fees.