Unit 11: Setting the MARR

MARR

Minimum Acceptable Rate of Return (also known as Hurdle Rate).

Use of MARR

It’s the benchmark rate used to determine project viability.

Factors influencing MARR

WACC, project cost, capital source, risk, market rate, planning horizon.

Capital Structure

The mix of debt (loans, bonds) and equity (shares, retained earnings).

Equity

Owner’s money, shares, retained earnings.

Debt

Outsider’s money, loans, bonds with fixed returns.

WACC

Weighted Average Cost of Capital, used in MARR determination.

WACC Formula

Σ(weight of capital source × cost of that source).

WACCequity

Weighted cost of equity financing (shares, retained earnings).

WACCdebt

Weighted cost of debt financing (loans, bonds).

Example - Nancy Botwin

Shows breakdown and WACC calculation using R17 million financing split.

Example - Weintraub Electronics

WACC calculated with debt-equity ratio and various loan rates.

Repo Rate

Interest rate at which the central bank lends to commercial banks (8.25%).

Prime Lending Rate

Rate at which commercial banks lend to clients (11.75%).

Inflation Rate

General increase in prices measured by CPI; affects purchasing power.

Monthly Loan Repayment Formula

PMT = P[r/n] / (1 - (1 + r/n)^-nt)

Excel Function for PMT

=PMT(rate, nper, pv, [fv], [type])

Monthly Payment Components

Consist of principal and interest, but exclude taxes and fees.