1. Problem Statement
For the follow up of CfH comment about my Week 11th Blog posting, in this posting I will discuss about the value of Minimum Attractive Rate of Return (MARR) as our basis to determine will a project be profitable or not?
There is a minimarket which has a big parking lot near to my house. Many food truck services park their “truck” there, from Kebab, meatball, noodles, to snow ice. Residential usually buy a snack in those food trucks when shopping at the minimarket. I wonder to make my own food truck, and I need to make sure that this business is feasible to proceed.
2. Feasible Alternatives
MARR 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 projects.
I will use Capital Asset Pricing Model (CAPM) as the basis here to determine MARR and take beta value from the listed company that has similar business/ risk with Takoyaki – Snacks.
3. Outcomes of Each Alternative
From its equation
Where Rs is the CAPM;
Risk Free Rate (RF)
Refer to tradingeconomics.com, we can know risk free rate Indonesia (December 2013) is 7.5%
The Level of Market Risk βS
Refer to Stern (http://www.stern.nyu.edu), we can know Country Default Spreads and Risk Premium update per January 2013, the Risk Premium in Indonesia is 8.8%
The Market Premium (RM – RF)
Refer to similar type business (Nippon Indosari Corpindo Tbk) in Jakarta Stock Exchange, the Beta ratio of snacks sector is 0.64
Based on information above, the cost of equity reflected by the risk of the business is
Rs = 7.5% + 8.8% *0.64
Rs = ea = MARR = 13.13%
4. Setting Minimum / Selection Criteria
From the calculations above, MARR of snack business is 13.13%. This percentage is higher than inflation rate 11.67 % in Indonesia.
5. Analysis / Comparison of the Alternatives Against the Criteria
Running a snack business can make our money grow, higher than inflation (13.3% > 11.67%).
6. Selection of Best / Preferred Alternative
In business point of view, for MARR = 13.3%, this business should be profitable.
7. Performance Monitoring and Post Evaluation of Result/ Follow up Assessment
This calculation has not include busines’s detailed data (capital, operating cost, market value projection). To decide whether this takoyaki project is profitable or not, in the next blog post I will compare IRR, EER and also Break even Analysis.
- Sullivan, William G., Wick, Elin M., Koelling, C. Patric. (2012), Engineering Economy. Chapter 5 Pp. 526 – 529, Fifteenth edition, Prentice hall.
- Gerobak Unik (2013). Jenis dan Tipe Gerobak. [ONLINE] Available at:http://www.gerobak-unik.com/. [Last Accessed 11 December 2013].
- Yummy Takoyaki (2011). Peluang Usaha Dengan Modal Terjangkau. [ONLINE] Available at: http://yummytakoyaki.blogspot.com/. [Last Accessed 11 Desember 2013].
- Trading Economics (2013). INDONESIA INTEREST RATE. [ONLINE] Available at: http://www.tradingeconomics.com/indonesia/interest-rate. [Last Accessed 27 December 2013].
- Aswath Damodaran (2013). Country Default Spreads and Risk Premiums. [ONLINE] Available at: http://pages.stern.nyu.edu/~%20adamodar/New_Home_Page/datafile/ctryprem.html. [Last Accessed 27 December 2013].
- Reuters (2013). Nippon Indosari Corpindo Tbk PT (ROTI.JK). [ONLINE] Available at: http://www.reuters.com/finance/stocks/overview?symbol=ROTI.JK. [Last Accessed 27 December 2013].
- Anggono Mahendrawan (2013). W7_ANG_MARR based on full equity fund for Student Pick-up Service. [ONLINE] Available at: https://simatupangaace2014.wordpress.com/2013/10/24/w7_ang_marr-based-on-full-equity-fund-for-student-pick-up-service/. [Last Accessed 27 December 2013].
- Trading Economics (2013). INDONESIA | ECONOMIC INDICATORS. [ONLINE] Available at: http://www.tradingeconomics.com/indonesia/indicators. [Last Accessed 27 December 2013].