8/19/2019 3360 UNIT 15 2014-I-01

1/20

ENGR 3360U Winter 2014

Unit 15

Dr. J. Michael Bennett, P. Eng., PMP,

UOIT,

Version 2014-I-01

MARR Selection

8/19/2019 3360 UNIT 15 2014-I-01

2/20

Unit 15 MARR Selection

Change Record

2014--01 nitial Creation

2014--0115-2 !r" #"M" $ennett% &"Eng"% &M& ENGR 3360U Eng Eco

8/19/2019 3360 UNIT 15 2014-I-01

3/20

Unit 15 MARR Selection

Co'r(e )'tline

1" Engineering Econo*ic(

2" General Econo*ic(

1" Microecono*ic(

2" Macroecono*ic(

3" Mone+ and the $an, oCanada

3" Engineering E(ti*ation

4" ntere(t and E.'i/alence

5" &re(ent Worth Anal+(i(

6" Ann'al Ca(h lo

" Rate o Ret'rn Anal+(i(

" &ic,ing the $e(t Choice

" )ther Choo(ing echni.'e(

10" Uncertaint+ and Ri(, 

11" nco*e and !ereciation

12" Ater-ta7 Ca(h lo(

13" Relace*ent Anal+(i(

14" nlation15" MARR Selection

16" &'8lic Sector (('e(

1" What Engineering (ho'ld ,no

a8o't Acco'nting

1" &er(onal Econo*ic( or the

Engineer 

2014--01 !r" #"M" $ennett% &"Eng"% &M& ENGR 3360U Eng Eco1-3

8/19/2019 3360 UNIT 15 2014-I-01

4/20

Unit 15 MARR Selection

Unit 15 Road Ma

9 15"1 Caital and it( co(t to an organi:ation9 15"2 )ort'nit+ Co(t(

9 15"3 Choo(ing the MARR

9 15"4 Caital 8'dgeting

2014--0115-4 !r" #"M" $ennett% &"Eng"% &M& ENGR 3360U Eng Eco

8/19/2019 3360 UNIT 15 2014-I-01

5/20

Unit 15 MARR Selection

15"1 Co(t o 'nd(

9 $orroed Mone+ ;  )ne actor that ill deter*ine MARR i( the

co(t o 8orroing *one+"

9 Co(t o Caital ;  he *one+ a ir* '(e( i( dran ro* the ir*

8/19/2019 3360 UNIT 15 2014-I-01

6/20

Unit 15 MARR Selection

WACC+ E7a*leA ir* ha( the olloing inancial (it'ation?

Co**on (hare( re.'ire a R)R =di/idend> o 11@$ond( are (old at @

Mone+ can 8e 8orroed at @

a7e( are 40@

What i( it( WACC

  BBBBBBBBBBR)R Ann'al

20M loan @ 1"M

20M 8ond( @ 1"4M

60M (hare( 11@ 6"6M

100M "M

2014--01 !r" #"M" $ennett% &"Eng"% &M& ENGR 3360U Eng Eco15-6

8/19/2019 3360 UNIT 15 2014-I-01

7/20

Unit 15 MARR Selection

A(('*e ir* ha( a 40@ ta7 rate"

Ater-ta7 $an, loan @=1 - 0"40> 5"4@

Ater-ta7 $ond( @=1 - 0"40> 4"2@

!i/idend( are not a7-ded'cti8le

CoC 20M=5"4@> D 20M=4"2@> D 60M=11@>

  "52M or the 100M@CoC "52100 "52@

2014--01 !r" #"M" $ennett% &"Eng"% &M& ENGR 3360U Eng Eco15-

8/19/2019 3360 UNIT 15 2014-I-01

8/20

Unit 15 MARR Selection

E7a*le 15"2 &o((i8le &roFect(

Proj # Cost eROR  

1 150, 30@

2 50, 45@

3 50, 3@

4 100, 40@5 200, 35@

6 100, 2@

200, 1@

250, 25@

300, 20@

10 300, 10@

11 400, 15@

12 Unli*ited =8ond(> @

2014--01 !r" #"M" $ennett% &"Eng"% &M& ENGR 3360U Eng Eco15-

8/19/2019 3360 UNIT 15 2014-I-01

9/20

Unit 15 MARR Selection

What i

o' had onl+ 00H hich o'ld +o'

choo(e

Ran, 8+ RoR 

2%4%3%5%1%6

)ort'nit+ co(t o'ld 8e roF =250H>

2014--01 !r" #"M" $ennett% &"Eng"% &M& ENGR 3360U Eng Eco15-

8/19/2019 3360 UNIT 15 2014-I-01

10/20

Unit 15 MARR Selection

15"2 )ort'nit+ Co(t

9 A ir* *a+ ha/e a 8road range o in/e(t*entoort'nitie("

9 o actor(? ;  So'rce o *one+ a/aila8le or roFect( ; 

ir*

8/19/2019 3360 UNIT 15 2014-I-01

11/20

Unit 15 MARR Selection

E7a*le 15-3

P# Cost Ks UAB Ks Life ! cRoR"

1 100 23"5 10 0 202 200 3"5 10 0 15

3 50 34"2 2 0 25

4 100 20 6 100 20

5 100 20 10 100 20

6 100 1 10 100 1

300 4"64 4 0 10

300 4"4 10 100 12

50 10 50 14

2014--01 !r" #"M" $ennett% &"Eng"% &M& ENGR 3360U Eng Eco15-11

I650H i( a/aila8le% hat i( the )ort'nit+ Co(t o Caital

8/19/2019 3360 UNIT 15 2014-I-01

12/20

Unit 15 MARR Selection

Sol'tion? ran, 8+ RoR 

3J1J4J5J6J2

)C 14@ =roFect >

2014--01 !r" #"M" $ennett% &"Eng"% &M& ENGR 3360U Eng Eco15-12

8/19/2019 3360 UNIT 15 2014-I-01

13/20

Unit 15 MARR Selection

15"3 Selecting the MARR 

9 Mini*'* Attracti/e Rate o Ret'rn =MARR> ;  A loer 8o'ndar+ or MARR *'(t 8e the co(t o

the *one+ in/e(ted in a roFect" ;  MARR (ho'ld not 8e le(( than the co(t o caital" ;  MARR (ho'ld not 8e le(( than the rate o ret'rn

on the 8e(t oort'nit+ oregone"

9 MARR (ho'ld 8e e.'al to the large(t o? ;  Co(t o 8orroed *one+ ;  Co(t o caital ;  )ort'nit+ Co(t

2014--0115-13 !r" #"M" $ennett% &"Eng"% &M& ENGR 3360U Eng Eco

8/19/2019 3360 UNIT 15 2014-I-01

14/20

Unit 15 MARR Selection

MARR  

9 MARR *a+ 8e adF'(ted 8a(ed on ercei/edri(," ;  Kigher ri(, *a+ re.'ire a higher MARR to

deter*ine the /alidit+ o an alternati/e"

9 Co*anie( 'nder a nor*al le/el o ri(, ha/et+ical MARR rate( o 12@;15@"

9 Koe/er% *'ch higher rate( are co**on or

dierent ind'(trie(% ('ch a( technolog+ (tart-'( (hort o caital or etrole'*% here the

ri(,( *a+8e *'ch higher"

2014--0115-14 !r" #"M" $ennett% &"Eng"% &M& ENGR 3360U Eng Eco

8/19/2019 3360 UNIT 15 2014-I-01

15/20

Unit 15 MARR Selection

Ri(, increa(e( MARR 

Additional rate alie( to

  06@ e.'i*ent relace*ent

0@ ne e.'i*ent

10@ ne rod'ct% nor*al *ar,et

12@ ne rod'ct% related *ar,et

14@ ne rod'ct% ne *ar,et

16@ ne rod'ct% oreign *ar,et

2014--01 !r" #"M" $ennett% &"Eng"% &M& ENGR 3360U Eng Eco15-15

8/19/2019 3360 UNIT 15 2014-I-01

16/20

Unit 15 MARR Selection

15"4 Caital $'dgeting

9 ir*( do not ha/e acce(( to 'nli*ited'nding to in/e(t in roFect(" ;  E7a*le? S'o(e 20 roFect( e7ceed the

MARR and there i( li*ited 'nding (o not all roFect( ith 8e 'nded"

9 So*e ir*( ill Ran, roFect( 8a(ed on theL8igge(t 8ang or the 8'c,

8/19/2019 3360 UNIT 15 2014-I-01

17/20

Unit 15 MARR Selection

Caital $'dgeting% cont

8/19/2019 3360 UNIT 15 2014-I-01

18/20

Unit 15 MARR Selection

S'**ar+

9 here are dierent (o'rce( o caitala/aila8le to a ir*" ;  Mone+ generated ro* oeration

 ;  !e8t? $orroed *one+ ;  E.'it+? Sale o e.'it+ li,e co**on or

 reerred (hare(

2014--0115-1 !r" #"M" $ennett% &"Eng"% &M& ENGR 3360U Eng Eco

U i 15 MARR S l i

8/19/2019 3360 UNIT 15 2014-I-01

19/20

Unit 15 MARR Selection

S'**ar+% cont

8/19/2019 3360 UNIT 15 2014-I-01

20/20

Unit 15 MARR Selection

S'**ar+% cont