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In business and for engineering economics in both industrial engineering and civil engineering practice, the minimum acceptable rate of return, often abbreviated MARR, or hurdle rate 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 the opportunity cost of forgoing other projects. [1]
The expected rate of return for the second investment is (.45 * .2) + (.55 * -1) = -46% The expected rate of return for the third investment is (.8 * .5) + (.2 * -1) = 20% These calculations show that in our scenario the third investment is expected to be the most profitable of the three.
This "required return" thus incorporates: Time value of money ( risk-free rate ) – according to the theory of time preference , investors would rather have cash immediately than having to wait and must therefore be compensated by paying for the delay.
Thus, internal rate(s) of return follow from the NPV as a function of the rate of return. This function is continuous. Towards a rate of return of −100% the NPV approaches infinity with the sign of the last cash flow, and towards a rate of return of positive infinity the NPV approaches the first cash flow (the one at the present).
Consider the dividend growth rate in the DDM model as a proxy for the growth of earnings and by extension the stock price and capital gains. Consider the DDM's cost of equity capital as a proxy for the investor's required total return. [5] + =
An annual rate of return is a return over a period of one year, such as January 1 through December 31, or June 3, 2006, through June 2, 2007, whereas an annualized rate of return is a rate of return per year, measured over a period either longer or shorter than one year, such as a month, or two years, annualized for comparison with a one-year ...
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In general, the WACC can be calculated with the following formula: [3] = = = where is the number of sources of capital (securities, types of liabilities); is the required rate of return for security ; and is the market value of all outstanding securities .