Sam is going to make your startup company selling hybrid three- wheelers. Sam is
ID: 2613930 • Letter: S
Question
Sam is going to make your startup company selling hybrid three- wheelers. Sam is going to assure you this will be a good investment if you are looking for a decent yield. There has not been a hybrid 3 wheeler yet (plenty of 4 wheeled cars out there though). He needs $500,000. Determine what your MARR will be based on inflation rate, his success chance, credit score, etc. Note, you will have him go to another potential investor, if you set a very high interest rate for the money you are lending. If he proposes to pay you ten payments of 115,000 what will be the rate of return on investment? Will it make you happy? What is the relation between this rate of return and MARR?Explanation / Answer
Lets assume that MARR for the project after taking Inflation, default risk premium and credit score is 15%
rate of return - using rate function in M S Excel =rate(nper,pmt,pv,fv,type) nper = 10 pmt = 115000 pv = -500000 fv =0 type =0
rate of return = rate(10,115000,-500000,0,0) = 18.94%
Yes this proposal make me happy as my MARR is 15% while rate of return over the period is 18.94%
rate of return is the rate which is earned on investment, while MARR is the minimum required return that a project at least should earn so concept of rate of return and MARR are used for investment decision making.
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