riaology
Learning path 4 · Topic 17 of 30

Set an acceptance threshold

MARR is the minimum attractive rate of return required for a project, not an intrinsic cash-flow property like IRR.

Change a scenario. Watch the consequence.
0022.5254550Marginal accepted return (%)Budget ($ million)
● Current scenarioMarginal accepted return (ranked prefix)
ProjectCost ($M)ReturnBudget decision
D845%Fund
B1235%Fund
A625%Fund
C1420%Skip
marginal accepted return in the stated ranked-budget heuristic · %Marginal accepted return=25%\text{Marginal accepted return}=25\%

Budget heuristic uses $26M; $4M remains. Marginal accepted return is a simplified MARR proxy, not a universal formula.

Follow the reasoning

Order projects by decreasing stated return, under the stated ranking assumption.

Cash-flow dates and signs are part of the answer. Model values retain precision; displays round money to cents. Illustrative assumptions exclude taxes and inflation unless stated.

01

What the model means

Opportunity cost, financing cost, capital availability, risk, and organizational policy inform MARR. A simplified capital-budget graph ranks stated project returns and looks at the marginal accepted opportunity. That can illustrate opportunity cost but is not a universal numerical definition of MARR.

02

Build the calculation

Use the stated ranking procedure when the question explicitly asks for it. For indivisible projects with a limited budget, high-return-first selection may fail to maximize total PW. Borrowing and lending rates can also differ, so financial assumptions matter.

PW(MARR)≥0for an acceptable independent investmentPW(MARR)\ge0\quad\text{for an acceptable independent investment}
Practice with feedback

Set up. Calculate. Explain.

Answer unit: %

Rebuild the starting scenario

Investment budget: 30 $ million; External alternative return: 7 %. Calculate the marginal accepted return in the stated ranked-budget heuristic.

Setup hint

Order projects by decreasing stated return, under the stated ranking assumption.

Open the visual solutionMarginal accepted return=25%\text{Marginal accepted return}=25\%
  1. Order projects by decreasing stated return, under the stated ranking assumption.
  2. Follow the ranked prefix until the next project would exceed the budget, using 7% as an external opportunity floor.
  3. For indivisible projects, greedy return ranking may not maximize PW. In practice MARR also reflects cost of capital, opportunity cost, risk, and policy.
0022.5254550Marginal accepted return (%)Budget ($ million)
● Current scenarioMarginal accepted return (ranked prefix)
ProjectCost ($M)ReturnBudget decision
D845%Fund
B1235%Fund
A625%Fund
C1420%Skip
marginal accepted return in the stated ranked-budget heuristic · %Marginal accepted return=25%\text{Marginal accepted return}=25\%

Budget heuristic uses $26M; $4M remains. Marginal accepted return is a simplified MARR proxy, not a universal formula.

Visual solution

Order projects by decreasing stated return, under the stated ranking assumption.

Cash-flow dates and signs are part of the answer. Model values retain precision; displays round money to cents. Illustrative assumptions exclude taxes and inflation unless stated.

Checks allow 0.1% numerical rounding (minimum $0.05 or 0.001 in the stated nonmonetary unit). Interpolated factors and rates are approximations; keep table precision consistent.

Answer unit: %

Transfer the idea to a new scenario

Use the displayed ranked-budget heuristic with a $22M budget and a 7% external opportunity. Report the marginal accepted project return.

Setup hint

Order projects by decreasing stated return, under the stated ranking assumption.

Open the visual solutionMarginal accepted return=35%\text{Marginal accepted return}=35\%
  1. Order projects by decreasing stated return, under the stated ranking assumption.
  2. Follow the ranked prefix until the next project would exceed the budget, using 7% as an external opportunity floor.
  3. For indivisible projects, greedy return ranking may not maximize PW. In practice MARR also reflects cost of capital, opportunity cost, risk, and policy.
0022.5254550Marginal accepted return (%)Budget ($ million)
● Current scenarioMarginal accepted return (ranked prefix)
ProjectCost ($M)ReturnBudget decision
D845%Fund
B1235%Fund
A625%Skip
C1420%Skip
marginal accepted return in the stated ranked-budget heuristic · %Marginal accepted return=35%\text{Marginal accepted return}=35\%

Budget heuristic uses $20M; $2M remains. Marginal accepted return is a simplified MARR proxy, not a universal formula.

Visual solution

Order projects by decreasing stated return, under the stated ranking assumption.

Cash-flow dates and signs are part of the answer. Model values retain precision; displays round money to cents. Illustrative assumptions exclude taxes and inflation unless stated.

Checks allow 0.1% numerical rounding (minimum $0.05 or 0.001 in the stated nonmonetary unit). Interpolated factors and rates are approximations; keep table precision consistent.

Explain the distinction

What distinguishes MARR from IRR?

Can you defend your setup?

Can you place each amount on the timeline, match the interest period, calculate the equivalent quantity, and state the decision or limitation?

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