Construction Planning

and Management
( CE5007 )
Presentation on
MARR, Incremental Rate of Return, Present Worth
Comparison & Future Worth Comparison

Prepared by,
Divyanshu Shekhar BE/10290/2013
Akshay Deshmukh BE/10293/2013
Vivek P. Bhimani BE/10294/2013
Harshit Choudhary BE/10297/2013

TOPICS
M.A.R.R

(Minimum Attractive Rate of Return)

Incremental
Present
Future

Rate of Return

Worth Comparison

Worth Comparison

What is Rate of Return in CPM ?

It is the effective annual interest rate
earned on an investment.

 Investment
Income
Profit
Rate

Of Return

TYPES

Minimum

Attractive Rate of Return

Incremental

Rate of Return

M.A.R.R.
Minimum

attractive rate of return (MARR) is the

lowest ROR at which a company will consider
investing.

MARR

is not usually used in calculating, only in

comparing. It is the do nothing option.

Factors Affecting M.A.R.R.

Market
Cost

Conditions

of Capital

Level

of competition

Example
Example
Option

1 ROR = 12.5%

Option

2 ROR = 11.875%

Option

3 = 10.5%

Option 4 = 16%

MARR = 15%
The company would choose not to invest

Incremental Rate Of Return

What is Incremental Rate of Return?
The incremental internal rate of return is an analysis of the
financial return to an investor or entity where there are two
competing investment opportunities involving different amounts
of investment. The analysis is applied to the difference between
the costs of the two investments. Thus, you would subtract the
cash flows associated with the less expensive alternative from the
cash flows associated with the more expensive alternative to
arrive at the cash flows applicable to the difference between the
two alternatives, and then conduct an internal rate of
return analysis on this difference.

Example

Let us say, a firm ABC International is considering obtaining a

colour copier, and it can do so either with a lease or an
outright purchase. The lease involves a series of payments
over the three-year useful life of the copier, while the
purchase option involves more cash up-front and some
continuing maintenance, but it also has a resale value at the
end of its useful life.

YEAR

LEASE

BUY

DIFFERENCE
(BUY-LEASE)

-7000

-29000

-22000

-7000

-1500

5500

-7000

-1500

5500

-7000

-1500

5500

+15000 (RESALE
VALUE)

15000
13.3 %

The following analysis of the incremental differences in the

cash flows between the two alternatives reveals that there is a
positive incremental internal rate of return for the purchasing
option. Barring any other issues (such as available cash to buy
the copier), the purchasing option therefore appears to be the
better alternative.

Present Worth Comparison

In this method, present worth of cash flow in terms of an equivalent

single sum is determined using an interest rate. This method is based on
the following assumptions:

Cash flows are known.

Interest Rate is known.

Comparisons are made before cash inflow.

The effect of inflation isnt taken into account.

Comparisons dont include unforeseen expenditures.

Comparisons dont include consideration of availability

of funds for implementation of the project.

Methods of Analysis
Two basic methods are used for present worth
analysis:

Present Worth Equivalence

In this case a present worth equivalent (one figure) is

determined for a series of future transactions.

Then, it can be compared with another figure representing a

competing option or the do-nothing alternative.

Net Present Worth

In this case there is an initial outlay at time 0 followed by a

series of receipts and disbursements.

It yields the following relationships: Net Present Worth

(NPW) = PW (Benefits) PW (Costs)

On choosing between alternatives, the one that maximizes

the net present worth is chosen

FUTURE WORTH COMPARISON

The Future worth may be determined

Directly from the cash flows by determining the future worth

value (using LCM or study period)

By determining the PW value by the F/P factor at the

establishment MARR( value of n depends upon which time
period has been used to determine PW-LCM or study period )

Factors determining future worth

equivalent
Different compound interest factors are responsible for
determining the future worth equivalent . They are as follows:

Single payment compound amount factor

Uniform series compound amount factor

future worth factors for arithmetic and geometric gradient

series etc.

Future Worth analysis

Applications: Projects that do not come on-line until the end of
the investment period , like

Toll Roads

Electric Generation facilities

Hotels

Commercial Buildings

Thank You!!