Minimum acceptable rate of return

From Wikipedia, the free encyclopedia

This article or section may require cleanup to meet Wikipedia's quality standards.
Please help improve this article or replace this tag with a more specific message. This article has been tagged since May 2006. (help, talk)

The Minimum Acceptable Rate of Return, or MARR, is the minimum return on a project a manager is willing to accept before starting a project, given its risk and the opportunity cost of foregoing other projects.

For example, suppose a manager knew that investing in a conservative project, such as a bond investment or another project with no risk, yields a known rate of return.

When analyzing a new project, the manager may use the conservative project's rate of return as the MARR. The manager will only implement the new project if its anticipated return exceeds the MARR by at least the risk premium of the new project.

[edit] Project Analysis

When a project has been proposed, it must first go through a preliminary analysis in order to determine whether or not its rate of return will be equal to the firm's MARR. This is accomplished by creating a Cash flow diagram for the project, and moving all of the transactions on that diagram to the same point, using the MARR as the interest rate. If the resulting value at that point is zero or higher, then the project will move on to the next stage of analysis. Otherwise, it is discarded.