A company has been invited to invest $1 million in a partnership and receive a guaranteed total

Question:

A company has been invited to invest $1 million in a partnership and receive a guaranteed total of $2.5 million after 4 years. By corporate policy, the MARR is always established at 4% above the real cost of capital. The real interest rate paid on capital is currently 10% per year and the inflation rate during the 4-year period is expected to average 3% per year.

(a) Is the investment economically justified?

(b) At what real interest rate on capital will the decision made above change?

MARR
Minimum Acceptable Rate of Return (MARR), or hurdle rate is the minimum rate of return on a project a manager or company is willing to accept before starting a project, given its risk and the opportunity cost of forgoing other... Partnership
A legal form of business operation between two or more individuals who share management and profits. A Written agreement between two or more individuals who join as partners to form and carry on a for-profit business. Among other things, it states...

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