You have been asked by the president of the company you work for to evaluate the proposed
Question:
TABLE ST7.5
You return to your office, quickly retrieve your old engineering economics text, and then begin to smile: Aha-this is a classic rate-of-return problem! Now, using a calculator, you find out that both projects have about the same rate of return: 18.1%. This figure seems to be high enough to justify accepting the project, but you recall that the ultimate justification should be done with reference to the firm's MARR. You call the accounting department to find out the current MARR the firm should use in justifying a project. "Oh boy, I wish I could tell you, but my boss will be back next week, and he can tell you what to use," says the accounting clerk.
A fellow engineer approaches you and says, "I couldn't help overhearing you talking to the clerk. I think I can help you. You see, both projects have the same IRR, and on top of that, project 1 requires less investment, but returns more cash flows
(-$30,000 + $20,000 + $18,200 = $8,200
and
-$40,000 + $43,000 + $5,000 = $8,000)
Thus, project 1 dominates project 2. For this type of decision problem, you don't need to know a MARR!"
(a) Comment on your fellow engineer's statement.
(b) At what range of MARRs would you recommend the selection of project 2?
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...
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