Deavyanne Johnston, the engineering manager at TZO Chemicals, is conducting an evaluation of al­ternatives based on ROR. She was given the fol­lowing data and told that due to the unusually large number of investment opportunities the company now has, all future projects must have a ROR that is at least 12.5% above the company’s weighted average cost of capital on an after-tax basis. If the company’s effective tax rate is 32%, what is the after-tax MARR she should use in her evaluation?

What will be an ideal response?


MARR = WACC + 12.5%. Total equity and debt fund is $15 million. Debt capital gets a tax break; equity does not. From Equation [10.4]

After-tax cost of debt = 10.4%(1 - 0.32) = 7.072%

After-tax WACC = equity cost + debt cost
= (4/15)(7.4%) + (6/15)(4.8%) + 5/15(7.072%)
= 1.973 + 1.920 + 2.357
= 6.25%

After-tax MARR = 6.25 + 12.5
= 18.75%

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