Tom, the owner of Burger Palace, determined that his weighted average cost of capital is 8%. He

Question:

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 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.

MARR
Minimum Acceptable Rate of Return (MARR), or hurdle rate is the minimum rate of return on a project a manager or company is willing to accept before starting a project, given its risk and the opportunity cost of forgoing other... Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of... Partnership
A legal form of business operation between two or more individuals who share management and profits. A Written agreement between two or more individuals who join as partners to form and carry on a for-profit business. Among other things, it states...