MARR is minimum attractive rate of return.
True FalseThe correct answer and explanation is :
The correct answer is False.
Explanation:
MARR (Minimum Attractive Rate of Return) refers to the minimum return that a company or investor expects to receive from an investment or project. It represents the lowest rate of return that justifies undertaking a particular project or investment. The MARR is a critical benchmark in decision-making processes, particularly in capital budgeting, where companies evaluate potential investments or projects based on their expected returns.
On the other hand, the term “Minimum Attractive Rate of Return” does not specifically mean that the rate is the minimum required to make a project worthwhile. It is the minimum threshold rate that is set by the investor or the company for evaluating investments. It is important because it serves as a benchmark against which the profitability and viability of an investment are judged. If the expected rate of return from a project is greater than or equal to the MARR, then the project may be deemed acceptable. If it falls below the MARR, the project would typically be rejected.
The MARR is influenced by several factors:
- Risk Profile of the Project: Higher risk projects usually have higher MARR to compensate for the risk.
- Opportunity Cost of Capital: The MARR must also be greater than the cost of capital, which represents the opportunity cost of investing in a particular project rather than other potential alternatives.
- Inflation and Market Conditions: Economic factors, including inflation and the general state of the market, also impact the determination of the MARR.
It’s worth noting that MARR is often used in methodologies like the Net Present Value (NPV) and Internal Rate of Return (IRR) in capital budgeting decisions. A project will typically be accepted if its IRR is greater than or equal to the MARR.
In conclusion, MARR is not the minimum rate of return that a project can ever generate but the minimum level of return that would make the project or investment attractive to pursue.