There are four main sources of capital for firms: retained profits, borrowed money, mortgage bonds, and capital stock. A profitable firm generates money from operations equal to retained profits plus depreciation charges, even without making a profit. The minimum attractive rate of return (MARR) should be greater than a firm's cost of capital, which includes the interest rates on borrowed money. Based on an example where the after-tax cost of interest is 8.52%, the MARR in this case should be greater than 8.52%.

1. Minimum Attractive Rate of
Return

2. SOURCES OF CAPITAL
• There are four sources of capital available to a firm
money generated from the operation of the firm
borrowed money
sale of mortgage bonds
sale of capital stock.

3. Money Generated from the Operation of the Firm
A major source of capital investment money is through the retention of profits resulting
from the operation of the firm.
Since only about half of the profits of industrial firms are paid out to stockholders, the half
that is retained is an important source of funds for all purposes, including capital investments.
In addition to profit, there is money generated in the business equal to the annual
depreciation charges on existing capital assets if the firm is profitable.
A profitable firm will generate money equal to its depreciation Charges plus its retained
profits.
Even a firm that earns zero profit will still generate money from operations equal to its
depreciation charges

4. How to decide MARR
Cost of Borrowed Money
It is the interest rate at which money can be borrowed.
Who will pay you loan.
Loans may be obtained from banks
Insurance companies
oil-producing nations

5. Cost of Capital
MARR is based on cost of capital. The general assumption concerning
the cost of capital is that all the money the firm uses for investments is
drawn from all the components of the overall capitalization of the firm

6. Example

7. AFTER-TAX INTEREST COSTS

8. Minimum Attractive Rate of Return (MARR) should be greater than 8.52%

9. What should be value of
MARR
Minimum attractive rate of return should be greater
than cost of capital

11. Minimum Attractive Rate of Return (MARR) should be greater than 8.4%

12. SELECTIONOF A MINIMUM
ATTRACTIVERATEOF RETURN

14. FIND INTERNAL RATE OF RETURN (IRR) OF EACH PROJECT

15. SORT THE PROJECT LIST ACCORDING TO IRR VALUE

16. NOW FIND CUMULATIVE FIRST COST OF ALL PROJECTS

17. SELECT PROJECTS BASED ON MAX INVESTMENT VALUE OF $ 800,000

18. SMALLEST MINIMUM ATTRACTIVE RATE OF RETURN IS 12.4%