| The Minimum Acceptable Rate of Return (MARR) is the rate used to discount cash flows and, consequently, has a direct affect on the outcome of project selection.;The MARRs of eleven companies were calculated using methods commonly described in engineering economic literature. The average range between the highest and lowest MARR for each company was 14.62%, while the greatest difference approached 60%. This analysis showed that the methods used to calculate the MARR are incompatible. The costs of equity for one company were calculated over a four-year period. The findings showed that the net equity flow methods yield very unstable results, ranging between 9% and 26%, whereas the CAPM and Tobin's q are within a 2.5% range. Since the company was considered stable over this period by Standard & Poor's, the net equity flow methods are deemed unsuitable for use in practice.;A literature review demonstrated that both academia and industry are undecided as to which method should be used to determine the MARR. However, Economic Value Added (EVA), a financial performance measure, is gaining widespread popularity in industry. This technique recognizes the weighted average cost of capital as the MARR and due to its appeal and acceptance should be carried over to the engineering economy classroom.;Incorporating risk into the MARR results in favouritism toward short-term projects. Risk should be factored into project cash flows with the MARR left as a risk-free rate. It is recommended that the engineering economic community recognize the MARR as the weighted average cost of capital, using Tobin's q to determine the cost of equity. |
