--- title: "What is MARR; how it is determined" subject: "Engineering Economics" chapter: 3 key: "semester_6/engineering_economics:marr-determination" source: https://www.bctengineer.com/q/semester_6/engineering_economics/marr-determination site: BCT Engineering --- # What is MARR; how it is determined Engineering Economics · Chapter 3: Basic Methodologies of Engineering Economic Analysis - Asked in: 2076 Shrawan, 4 marks; 2071 Bhadra, 4 marks (asked 2 times) - Video: [Rate of Return Vs Minimum Attractive Rate of Return](https://www.youtube.com/watch?v=49H-KfUjiH4) — Engineer Clearly - Answer checked by Claude Opus 5.5 (high effort) on 2026-10-14 - Page: https://www.bctengineer.com/q/semester_6/engineering_economics/marr-determination - Whole chapter: https://www.bctengineer.com/md/semester_6/engineering_economics/chapter-3 ## Question What is MARR? How do you determine the MARR for a company and project? ## Short answer MARR is the minimum acceptable rate of return used as the discount rate in project evaluation. It is set based on the weighted average cost of capital, opportunity cost, risk premium, inflation, and capital rationing, with adjustments for project-specific risk. ## Answer #### What is MARR The Minimum Attractive Rate of Return (MARR) is the lowest rate of return that a company will accept to invest in a project. A project is accepted only if its IRR (or ERR) ≥ MARR, and the MARR is used as the interest rate in PW, FW, AW and B/C calculations. It is also called the hurdle rate or cut-off rate. #### How it is determined 1. **Cost of capital.** MARR must be at least the weighted average cost of capital (WACC): the cost of debt (loan interest, after tax) and the cost of equity (dividend and growth expected by owners), weighted by their share in the capital. 2. **Opportunity cost.** It must not be below the return from the best alternative use of the money (for example, bank fixed deposit, government bonds, or other projects that must be dropped when funds are limited). 3. **Risk premium.** A risk allowance is added: MARR = risk-free rate + risk premium. Risky projects (new product, new technology) get a higher MARR than safe ones (cost reduction, replacement). 4. **Inflation.** The rate should cover expected inflation so that the real return remains positive. 5. **Capital rationing and policy.** When funds are limited, MARR is raised until the accepted projects just use the available budget. Management policy and the investment horizon also affect it. #### For a company and for a project - **Company MARR:** a single base rate (usually WACC plus a margin) for the whole firm. - **Project MARR:** the company rate adjusted for the project's own risk, life and type: MARR(project) = base MARR + project risk premium. Example: bank loan at 12%, owner expects 18% on own money, 50:50 mix gives WACC = 15%; adding 3% for risk gives MARR = 18%. ## Check yourself The answer's key points as multiple-choice questions, with the correct option and why. 1. What is MARR? A. The maximum rate a bank charges B. The inflation rate C. The lowest rate of return a company will accept for a project D. The average rate of all past projects Answer: C. MARR is the hurdle or cut-off rate; accept a project only if IRR or ERR >= MARR. (Key point: Definition) 2. What is the lower bound of MARR in terms of capital cost? A. The cost of debt only B. The weighted average cost of capital (WACC) C. Zero D. The risk-free rate only Answer: B. MARR must be at least WACC, combining cost of debt and equity by their shares. (Key point: Cost of capital) 3. How does risk enter the MARR? A. MARR = risk-free rate + risk premium B. MARR = risk-free rate - risk premium C. Risky projects get a lower MARR D. Risk is ignored in MARR Answer: A. Risky projects like new technology get a higher MARR than safe ones. (Key point: Risk premium) 4. Loan at 12%, owner expects 18%, 50:50 mix, plus 3% risk. What is MARR? A. 15% B. 21% C. 30% D. 18% Answer: D. WACC = 0.5x12 + 0.5x18 = 15%; adding 3% risk gives 18%. (Key point: WACC example) ## Related in Engineering Economics - [Sensitivity of PW to investment and MARR](https://www.bctengineer.com/question.md?key=semester_6%2Fengineering_economics%3Asensitivity-investment-marr-10-50) — Engineering Economics, chapter 6, asked 2× - [IRR evaluation, MARR 20%](https://www.bctengineer.com/question.md?key=semester_6%2Fengineering_economics%3Airr-60000-cash-flow-20) — Engineering Economics, chapter 3 - [ERR with MARR = ε = 10%](https://www.bctengineer.com/question.md?key=semester_6%2Fengineering_economics%3Aerr-six-year-cash-flow) — Engineering Economics, chapter 3 - [Define IRR; find IRR and ERR of project](https://www.bctengineer.com/question.md?key=semester_6%2Fengineering_economics%3Airr-err-define-project-15) — Engineering Economics, chapter 3, asked 2× - [Both payback periods, is project acceptable](https://www.bctengineer.com/question.md?key=semester_6%2Fengineering_economics%3Apayback-both-types-acceptable) — Engineering Economics, chapter 3 - [Modified B/C ratio for 100,000 project](https://www.bctengineer.com/question.md?key=semester_6%2Fengineering_economics%3Amodified-bcr-100000-25000) — Engineering Economics, chapter 3 ## Related in other subjects - [Feasibility using two methods, MARR 15%](https://www.bctengineer.com/question.md?key=semester_7%2Fproject_engineering%3Afeasibility-two-methods-marr-15) — Project Engineering, chapter 6 - [Joint stock company advantages and limitations](https://www.bctengineer.com/question.md?key=semester_7%2Forganization_and_management%3Ajoint-stock-advantages) — Organization and Management, chapter 4 - [Ownership and structure for software company](https://www.bctengineer.com/question.md?key=semester_7%2Forganization_and_management%3Aceo-software-ownership) — Organization and Management, chapter 4 - [Proposal to start a software company](https://www.bctengineer.com/question.md?key=semester_5%2Fcommunication_english%3Aproposal-software-company-ministry) — Communication English, chapter 6