Question
Anne is preparing a home office to perform subcontract projects for midsized architect firms. She plans to use $25,000 of her own funds which currently
Anne is preparing a home office to perform subcontract projects for midsized architect firms. She plans to use $25,000 of her own funds which currently generate a return of 2.5% per year. The remainder of financing will be provided by a $30,000 bank loan carrying a 7.5% per year interest rate. She hopes to realize a return of 3% above the average cost of capital to establish her office, and she realizes that the factors of inflation and risk should also be considered. Her decision is to add another 1.5% per year to compensate for these elements. What is the MARR she should use when evaluating projects? (must show the formulas and calculation steps)
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