ECONOMIC STUDY

METHODS
chapter 4

economic study method

THE MINIMUM ATTRACTIVE RATE OF RETURN

(MARR)
The minimum acceptable rate of return, often abbreviated MARR, or hurdle rate is the minimum
rate of return on a project.

Ito yung "Minimum rate" of Return na sine-set ng organization or ng individual para

masabi na acceptable o economically viable ang isang project.

Page 02 of 15
EXAMPLE
if MARR >= 5%

a. ror= 2% b. ror = 5% C. 7%

D. 10%

Page 03 of 15
EXAMPLE
if MARR >= 5%

a. ror= 2% b. ror = 5% C. 7%

D. 10%

Page 03 of 15
EXAMPLE
if MARR >= 10%

a. ror= 2% b. ror = 5% C. 7%

D. 10%

Page 03 of 15
EXAMPLE
if MARR >= 10%

a. ror= 2% b. ror = 5% C. 7%

D. 10%

Page 03 of 15
 economic study method

HOW TO COMPUTE THE MARR?

Only the individual or the organization can dictate the MARR.

Page 02 of 15
ROR RATE OF RETURN
A rate of return (RoR) is the net gain
or loss of an investment over a
specified time period, expressed as a
percentage of the investment’s initial
cost. When calculating the rate of
return, you are determining the
percentage change from the
beginning of the period until the end.
economic study methods
1 . 1 P R E S E N T W O R T H M E T H O D

2 . F U T U R E W O R T H M E T H O D

3 . A N N U A L W O R T H M E T H O D

4 . I N T E R N A L R A T E O F R E T U R N M E T H O D ( i r r )

5 . E X T E R N A L R A T E O F R E T U R N By using these Economic Study

Methods maa-identify natin kung
6 . P A Y B A C K P E R I O D M E T H O D pasok ang isang project sa nai-set
na MARR.
Or simply, kung viable ba ito.
Present worth method If the PW , using the MARR as the interest
is greater than or equal to zero, then the
project is economically stable.
The present worth method is quite popular
PW (i=MARR)>=0 ; economically viable
in industry because all future costs and
revenues are transformed to equivalent
monetary units NOW; that is, all future
cash flows are converted (discounted) to
present amounts (e.g., dollars) at a
specific rate of return, which is the MARR.
This makes it very simple to determine
which alternative has the best economic
advantage.
Present worth method
example 1

30,000

cash flow diagram

8, 500 8, 500 8, 500 8, 500 8, 500

4,500
Present worth method
example 1

PW= Present Worth ng pumapasok na pera - Present Worth ng lumalabas na pera

Present Worth ng lumalabas na pera = 30,000
Present Worth ng pumapasok na pera = 28,493.32

Present worth method

example 1

PW= Present Worth ng pumapasok na pera - Present Worth ng lumalabas na pera

Present Worth ng lumalabas na pera = 30,000
Present Worth ng pumapasok na pera = 28,493.32

Present worth method

example 1

PW= Present Worth ng pumapasok na pera - Present Worth ng lumalabas na pera

Present Worth ng lumalabas na pera = 30,000
Present Worth ng pumapasok na pera = 28,493.32 + 2237.30

Present worth method

example 1

PW= Present Worth ng pumapasok na pera - Present Worth ng lumalabas na pera

Present Worth ng lumalabas na pera = 30,000
Present Worth ng pumapasok na pera = 28,493.32 + 2237.30

Present worth method

example 1

PW= Present Worth ng pumapasok na pera - Present Worth ng lumalabas na pera

Present Worth ng lumalabas na pera = 30,000
Present Worth ng pumapasok na pera = 28,493.32 + 2237.30

PW= 28,493.32+2,237.30-30,000
PW=730.62
Present worth method
example 2 : MARR = 20 %

PW= Present Worth ng pumapasok na pera - Present Worth ng lumalabas na pera

Present worth method
example 2 : MARR = 20 %

PW= Present Worth ng pumapasok na pera - Present Worth ng lumalabas na pera

Present Worth ng lumalabas na pera = 30,000
Present Worth ng pumapasok na pera = 24,420.20+1,808.45

Present worth method

example 2 : MARR = 20 %

PW= Present Worth ng pumapasok na pera - Present Worth ng lumalabas na pera

Present worth method
example 2 : MARR = 20 %

PW= Present Worth ng pumapasok na pera - Present Worth ng lumalabas na pera

Present Worth ng lumalabas na pera = 30,000
Present Worth ng pumapasok na pera = 24,420.20+1,808.45

Present worth method

example 2 : MARR = 20 %

PW= Present Worth ng pumapasok na pera - Present Worth ng lumalabas na pera

Present Worth ng lumalabas na pera = 30,000
Present Worth ng pumapasok na pera = 24,420.20+1,808.45

Present worth method

example 2 : MARR = 20 %

PW= Present Worth ng pumapasok na pera - Present Worth ng lumalabas na pera

Present Worth ng lumalabas na pera = 30,000
Present Worth ng pumapasok na pera = 24,420.20+1,808.45

PW= 24,420.20+1,808.45 -30,000

PW= -2,771.35
Present worth method
example 2 : MARR = 20 %

PW= Present Worth ng pumapasok na pera - Present Worth ng lumalabas na pera

Present Worth ng lumalabas na pera = 30,000
Present Worth ng pumapasok na pera = 24,420.20+1,808.45

PW= 24,420.20+1,808.45 -30,000

PW= -2,771.35
FUTURE If the FW , using the MARR as the interest is
greater than or equal to zero, then the

WORTH project is economically stable.

METHOD
FUTURE worth method
example 1

50,000

cash flow diagram

11, 000 11,000 11, 000 11,000 11,000

7,500
FUTURE worth method
example 1

FW= Future Worth ng pumapasok na pera - Future Worth ng lumalabas na pera

Future Worth ng lumalabas na pera = 149,229.20
Future Worth ng pumapasok na pera = 7,500+109,229.12
FW = -32,570. 08
FUTURE worth method
example 1

FW= Future Worth ng pumapasok na pera - Future Worth ng lumalabas na pera

Future Worth ng lumalabas na pera = 149,229.20
Future Worth ng pumapasok na pera = 7,500+109,229.12
FW = -32,570. 08
FUTURE worth method
example 1

FW= Future Worth ng pumapasok na pera - Future Worth ng lumalabas na pera

Future Worth ng lumalabas na pera = 149,229.20
Future Worth ng pumapasok na pera = 7,500+109,229.12
FW = -32,570. 08
FUTURE worth method
example 1

FW= Future Worth ng pumapasok na pera - Future Worth ng lumalabas na pera

Future Worth ng lumalabas na pera = 149,229.20
Future Worth ng pumapasok na pera = 7,500+109,229.12
FW = -32,570. 08
8, 500
FUTURE worth method
example 1

FW= Future Worth ng pumapasok na pera - Future Worth ng lumalabas na pera

Future Worth ng lumalabas na pera = 149,229.20
Future Worth ng pumapasok na pera = 7,500+109,229.12
FW = -32,570. 08
FUTURE worth method
example 1

FW= Future Worth ng pumapasok na pera - Future Worth ng lumalabas na pera

Future Worth ng lumalabas na pera = 149,229.20
Future Worth ng pumapasok na pera = 7,500+109,229.12
FW = -32,570. 08
 Page 06 of 15

ANNUAL If the AW , using the MARR as the interest is

greater than or equal to zero, then the

WORTH project is economically stable.

METHOD
ANNUAL WORTH METHOD

R= revenue E= Expenses CR= capital recovery rate PS: R- E = income

CR(Capital Recovery Rate )is the annual cost of the capital invested.
So, meaning kumikita ang investment ng 217.77 pesos bawat taon.


NOT ECONOMICALLY VIABLE !

 Page 08 of 15

RECAP
PRESENT WORTH FUTURE WORTH ANNUAL WORTH

Ito yung kikitain Ito yung Ito yung

mo agad o yung kikitain mo sa kikitain mo
kikitain mo sa taon - taon.
hinaharap
simula.
INTERNAL If the IRR, is equal or greater than the MARR ,
then the project is economically viable.

RATE OF IRR >= MARR ; ECONOMICALLY VIABLE

RETURN The IRR is the rate of which the present

worth of the investment would be equal to
the present worth all the expenses

(IRR)
EXTERNAL If the ERR, is equal or greater than the MARR ,
then the project is economically viable.

RATE OF ERR >= MARR ; ECONOMICALLY VIABLE

RETURN The ERR is the rate of which the FUTURE

WOTH of the investment would be equal to
the FUTURE WORTH all the expenses .

(ERR)
PAYBACK If the ERR, is equal or greater than the MARR ,
then the project is economically viable.

PERIOD ERR >= MARR ; ECONOMICALLY VIABLE

METHOD Gaano katagal babalik yung investment.

thank you!