a study on marginal efficiency of capital and attached cast study on the same.

1. MARGINAL EFFICIENCY OF
CAPITAL

2. SYNOPSIS
• Introduction
• Marginal efficiency of capital.
• Factors effecting MEC
• MEC and interest rates
• How companies maintain Capital using MEC
• Case study
• Conclusion

3. INTRODUCTION
 Irving Fisher was first economist to make use of concept MEC
in 1920.
 He gave it a name Rate of return over cost.
 Simply MEC means “expected rate of profitability of new
investment”.
 It’s calculation depends upon two factors mainly
I. amount of profit
II. cost of capital asset

4. MARGINAL EFFICIENCY OF
CAPITAL
 The marginal efficiency of capital (MEC) is that rate of
discount which would equate the price of a fixed capital asset
with its present discounted value of expected income.
 In short, MEC is the internal rate of return of an extra unit of
capital.
 The theory of marginal efficiency indicates that investment
decisions will be influenced by:
I. The marginal efficiency of capital
II. The interest rates

5. MEC CURVE

6. Factors Affecting the Marginal
Efficiency of Capital
Marginal
Efficiency
of Capital
Cost of
Capital
Demand for
goods
Marginal rate
of Tax
Availability of
Finance
Expectations
and
confidence
Technological
Innovation

7. Factors Affecting the Marginal
Efficiency of Capital
1. The cost of capital:
If cheap capital is available for investment, then investment
opportunities become more attractive.

8. Factors Affecting the Marginal
Efficiency of Capital
2. Demand for goods and services
If tastes and preferences change and demand for a good increases,
then the increased demand is likely to increase profitability.
3. The marginal rate of tax
If the marginal rate of tax is increased then the net return on an
investment will fall, reducing the marginal efficiency of capital.
4. The availability of finance
Restrictions on lending will limit investment. A relaxation of
credit controls will make investment easier.

9. Factors Affecting the Marginal
Efficiency of Capital
5. Expectations and confidence
If people believe that growth in economy is slowing and
unemployment may rise in the foreseeable future, then demand in the
economy may contrast.
6. Technological change
Innovation in products or processes may increase the potential size of
the market or help to drive down costs.

10. MEC AND INTEREST RATES
An investor while taking an investment decision makes a comparison
between MEC and rate of interest.
 when ROI is less than MEC (ROI<MEC) investor make more
investment.
 When ROI is more than MEC (ROI>MEC) no investment will be
made.
 When ROI is equal to MEC (ROI=MEC) investor stop making
any more investment.

11. HOW COMPANIES MAINTAIN
CAPITAL USING MEC
EXAMPLE:
• Suppose the price of machine is 30000.Duration of life of machine
is 10 years, expected income during this period is 60000.
NOW
Total Profit of machine is 60000-30000= 30000
Average profit per year - 30000/10 = 3000
MEC = 3000/30000 *100= 10%

12. CASE STUDY
• This is case is about Nike which is a popular brand in sporting
apparel division.
• Nike generated 2.81billion$ in operating income on revenue
of 20.9billion$ in FY 2014 end of may.
• Nike planning on expansion in to fashion apparel segment.
• 2.5billion$ is capital investment (marginal capital) they are
going to invest.
• Expected market share will be at 2% in first year.
• Gross profit margins are expected to be a 23% of revenues.
• Total time period is 12 years.
• Nike has used MEC for taking decision on expansion plan
investment .

13. CONCLUSION

14. THANK YOU !!!