Construction Planning and

Management
( CE 5007 )
Presentation on
M.A.R.R. , Incremental rate of return , Present worth Comparison &
Future worth comparison

Prepared By:-
Divyanshu
Shekhar( BE/10290/13)
Akshay Deshmukh
(BE/10293/13)
Vivek P. Bhimani
(BE/10294/13)
Harshit Chowdhary
(BE/10297/13)
 M.A.R.R
Def.
The minimum attractive rate of
return , often abbreviated as
M.A.R.R. , is the minimum rate of
return on a project a manager or
company is willing to accept before
starting a project, given its risk and
opportunity cost of forgoing other
projects.
 COMPONENTS OF M.A.R.R
The MARR is often decomposed into the
sum of the following components :-
Traditional inflation-free rate of interest for
risk-free loans.
Expected rate of inflation.
The anticipated change in the rate of
inflation, if any, over the life of the
investment.
The risk of defaulting on a loan.
The risk profile of a particular venture.
FACTORS AFFECTING M.A.R.R
1.
Incremental Rate Of Return

What is Incremental Rate of Return?

The incremental internal rate of return is an analysis of the

financial return to an investor or entity where there are two
competing investment opportunities involving different amounts
of investment. The analysis is applied to the difference between
the costs of the two investments. Thus, you would subtract the
cash flows associated with the less expensive alternative from
the cash flows associated with the more expensive alternative to
arrive at the cash flows applicable to the difference between the
two alternatives, and then conduct an internal rate of
return analysis on this difference.
 Example

Let us say, a firm ABC International is considering obtaining a

colour copier, and it can do so either with a lease or an
outright purchase. The lease involves a series of payments
over the three-year useful life of the copier, while the purchase
option involves more cash up-front and some continuing
maintenance, but it also has a resale value at the end of its
useful life.
 YEAR LEASE BUY DIFFERENCE
(BUY-LEASE)
0 -7000 -29000 -22000

1 -7000 -1500 5500

2 -7000 -1500 5500

3 -7000 -1500 5500

+15000 15000
(RESALE VALUE)
13.3 %

The following analysis of the incremental differences in the

cash flows between the two alternatives reveals that there is a
positive incremental internal rate of return for the purchasing
option. Barring any other issues (such as available cash to buy
the copier), the purchasing option therefore appears to be the
better alternative.
 Present Worth Comparison
In this method, present worth of cash flow in terms of an
equivalent single sum is determined using an interest rate is
determined using an interest rate. This method is based on the
following assumptions:-
Cash flows are known.
Interest Rate is known.
Comparisons are made before cash inflow.
The effect of inflation isnt taken into account.
Comparisons dont include unforeseen expenditures.
Comparisons dont include consideration of availability
of funds for implementation of the project.
 Methods of Analysis
Two basic methods are used for present worth
analysis:-
Present Worth Equivalence
In this case a present worth equivalent (one figure) is
determined for a series of future transactions.
Then, it can be compared with another figure
representing a competing option or the do-nothing
alternative.
 Net Present Worth
In this case there is an initial outlay at time 0 followed by a
series of receipts and disbursements.
It yields the following relationships: Net Present Worth
(NPW) = PW (Benefits) PW (Costs)
On choosing between alternatives, the one that maximizes
the net present worth is chosen
FUTURE WORTH COMPARISON

In this method, the future worth of each component of cash

flow is evaluated and the algebraic sum of each mutual work
becomes basis for comparison. Although there is a special
advantage in using this method over the present worth
method , it is frequently used only where the owner expects
to save investment after some time.