Question

Dawn is preparing a home office to perform subcontract projects for midsized architect firms. She plans to use $16.000 of her own funds, which currently generate a return of 4% per year. The remainder of financing will be provided by a $12,000 bank loan carrying a 9% per year interest rate. She hopes to realize a return of 3% above the average cost of capital to establish her office, and she realizes that the factors of Inflation and risk should also be considered. Her decision is to add another 3% per year to compensate for these elements. What is the MARR she should use when evaluating projects?

Answer 1

Answer:

Calculation of WACC:

Source	Amount	Weights	Cost	Weighted Cost
Own Funds	16,000	0.57	4%	2.28
Bank Loan	12,000	0.43	9%	3.87
	28,000			6.15

She hopes to realise a return of 3% above average of capital i.e., she needs (6.15 + 3) = 9.15

She adds another 3% per year to compensate for inflation and risk.

MARR She Should Use = 9.15 + 3 = 12.15

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