Last Updated on September 6, 2026 by Maged kamel
What are MARR and WACC?
What is the minimum attractive rate of return?
The first Expression is the MARR, which is the Minimum Attractive Rate of Return when considering borrowing from your cousin to start a new business, such as opening a coffee shop.
You must still have a return of more than that 10%, at least 11%, to make business, otherwise, you will lose in the future, so we want the minimum % to safeguard against losing, if you invest with a lower %, then you will lose.
What is the weighted average cost of capital (WACC)?
WACC is the weighted cost of Money from mixed Money lenders. This is a mix of Money you want to get from others to run your business.
If you borrow Money from a bank, this is referred to as debt. If you draw from your funds, called Equity, or an equity Investor invests with you, they will receive a higher rate than the bank offers.
Remember, CC should be used if you have a mix of equity lenders and your. The debt is the bank.
If you take from your equity, then the equity and the bank will be canceled, and vice versa. If you take Money from a bank, disregard the equity component, as we will see.
There is a sketch as shown. Cost of capital, in simpler terms, is the Money needed to run your business. It can be divided into two parts: one is borrowed from the bank and incurs a cost.
The second part of the funding is achieved through equity financing and bond purchases, with the cost of equity defined as the Cost Associated with using shareholders’ capital. The cost of capital =percentage of (cost of debit+ cost of equity)/ total cost.
WACC with no tax.
Let us have a look at an example. If one-third of the capital of the firm is borrowed at a rate of 6%, and the remainder of the capital is equity earning 12%, what will be the alleged minimum rate of return? This is a sketch for the capital: if someone borrows from the bank, we call it debt. Suppose we take from our own funds; we call it Equity. Each one, Equity, has a cost.
This is the capital in our example: 1/3 of the investment is taken from the bank; the rate of the bank is 6%; the remaining investment, which is 2/3, is taken from equity, and the cost of
To get the WACC for this case, 1/3* of the investment from the Bank * 0.06 + (2/3)*0.12 = 10%. This is called WACC; then the minimum attractive rate of return must be >10%. The remaining investment, which is two-thirds, is sourced from Equity, with an equity cost of 12% for Equityix.
To get the WACC for this case:(1/3* total investment from the Bank *0.06)+(2/3)*(0.12) =10%. This is called the WACC; therefore, the minimum attractive rate of return must be greater than 10%.
This is the equation used in estimation =(E/V)RE+(D/V)(1-Tc)+(D/V)*(1-Tc), Tc the tax rate. The relevant definitions of each item are shown.
WACC with tax included.
Solved example, if debt=$2000, Rate of debt=0.06, if Equity =$8000, Rate of Equity=0.125, and Tax rate 30%
The WACC can be calculated using a modified equation that accounts for the tax rate. Please refer to the next slide.
In the WACC, we take the $8000 and multiply it by 12.50%, then the remaining investment, which is $2000. 20000.06 (deduction after tax is taken into consideration).
The PDF used to illustrate this post can be downloaded from the following button.
The following post 4b: Easy to introduce the definition of IRR-NPV.
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