Tom, the owner of Burger Palace, determined that his weighted average cost of capital is 8%. He expects a return of 4% per year on all of his investments. A proposal presented by the owner of the Dairy Choice next door seems quite risky to Tom, but it is an intriguing partnership opportunity. Tom has determined that the proposal’s “risk factor” will require an additional 3% per year return for him to accept it. (a) Use the recommended approach to determine the MARR that Tom should use and explain how the 3% risk factor is compensated for in this MARR. (b) Determine the effective MARR for his business if Tom turns down the proposal.
Tom, the owner of Burger Palace, determined that his weighted average cost of capital is 8%. He expects a return of 4% per year on all of his investments. A proposal presented by the owner of the Dairy Choice next door seems quite risky to Tom, but it is an intriguing partnership opportunity. Tom has determined that the proposal’s “risk factor” will require an additional 3% per year return for him to accept it. (a) Use the recommended approach to determine the MARR that Tom should use and explain how the 3% risk factor is compensated for in this MARR. (b) Determine the effective MARR for his business if Tom turns down the proposal.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Tom, the owner of Burger Palace, determined that
his weighted average cost of capital is 8%. He expects
a return of 4% per year on all of his investments.
A proposal presented by the owner of the
Dairy Choice next door seems quite risky to Tom,
but it is an intriguing partnership opportunity. Tom
has determined that the proposal’s “risk factor”
will require an additional 3% per year return for
him to accept it.
(a) Use the recommended approach to determine
the MARR that Tom should use and explain
how the 3% risk factor is compensated for in
this MARR.
(b) Determine the effective MARR for his business
if Tom turns down the proposal.
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