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Dawn is preparing a home office to perform subcontract projects for midsized architect firms. She plans to use $15,000 of her own funds, which currently generate a return of 4% per year. The remainder of financing will be provided by a $10,000 bank loan carrying a 9% per year interest rate. She hopes to realize a return of 3% above the average cost of capital to establish her office, and she realizes that the factors of inflation and risk should also be considered. Her decision is to add another 2% per year to compensate for these elements. What is the MARR she should use when evaluating projects

Sagot :

abiolataiwo2015

What the MARR she should use when evaluating projects is 11.00

First step is to calculate WACC:

Source Amount Weights Cost Weighted Cost

Own Funds $15,000 0.60 4% 2.28

Bank Loan $10,000 0.40 9% 3.87

Total                $25,000                          6.00

Weights

Own Funds $15,000/$25,000=0.60

Bank Loan $10,000/$25,000=0.40

   

Weighted cost

Own Funds 0.60×4%=2.4

Bank Loan 0.40×9%=3.6

Total                                 6.00

Now let calculate her MARR

MARR= 6+ 3 +2

MARR= 11.00

Inconclusion the MARR she should use when evaluating projects is 11.00

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