Chap_15 - Dividends Solve for i Return Available Elsewhere...

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    IE 3125  Engineering  Economic Analysis Chapter 15 Determining MARR
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    Economic Decision Making Define alternatives Determine time horizon (life) Develop cash flow profiles Specify MARR Compare using measures of worth Perform supplementary analysis Select preferred alternative
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    Determining MARR Add a fixed % to the firm’s cost of  capital Exceed the firm’s average rate of return  for the past 5-10 years Return available elsewhere for  investments of comparable risk
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    Cost of Capital Debt Take out loans Sell bonds Equity Sell shares of stock Reinvest earnings (cash) Weighted average ( 29 T m r k m - - + = 1 1 1 s P D k = 4 4 3 3 2 2 1 1 p k p k p k p k k a + + + =
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    10-year Average ROI Stock price
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Unformatted text preview: Dividends Solve for i Return Available Elsewhere Other investments of equivalent risk Return for companies in similar business DJ 30 Ind. S&P 500 Dec. 1994 3834 459 Dec. 2004 10428 1174 Return 10.5% 9.8% MARR as a management tool Use to limit investment High MARR in lean years Low MARR in good years Use to compensate for risk High MARR for risky projects Low MARR for sure thing By the Numbers Average return on total capital for US firms is about 8% Firms of average risk use MARR values from 12-15% Public entities use MARR values from 4-6%...
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Chap_15 - Dividends Solve for i Return Available Elsewhere...

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