In this article, I want to talk about Minimum Acceptable Rate of Return (MARR), the concept that can give an answer to “1,000$ today is equal to what amount of money next year?” By reading this article you would be able to have a sense on which businesses are suitable for you and which aren’t.
In this article, I consider that you are familiar with Time Value of Money. But if you are not, don’t worry you can read that article in a few minutes first.
What is the question?
As I said earlier, the main question that I want to answer in this article is “1,000$ today is equal to what amount of money next year?” according to the Time Value of Money concept. The answer is in the MARR. Let me tell you what it is with an example:
Consider that you have a business idea which needs 1,000$ to start and it gives you 20% profit each year. That means you will have a 200$ of profit per year. Now one of your friends tells you that he has another idea that needs 1,000$ and will give 10% of profit each year. Which one will you choose to start a business with?
Of course you will choose the first one because it has a better profit rate. That’s the true meaning of the Minimum Acceptable Rate of Return. As a matter of fact, you won’t choose any business or project less than 20% profit. That means the Minimum Acceptable Rate of Return for you is 20%.
What is the Minimum Acceptable Rate of Return?
The MARR is the least profit rate you expect from every business project you are involved in. But you might ask what is the Minimum Acceptable Rate of Return number? Well, it’s personal! Let me show you why.
Minimum Acceptable Rate of Return is personal
I want to show this with a simple example so you can see what my point is. Let’s say I have a business offer that has 15% of profit rate which name is “MB”. I want to offer MB to two persons, Tom and John.
Tom and John are both business owners. Tom’s business profit rate is 10% and John’s business profit rate is 20%. So as you know now, Tom’s MARR is 10% and John’s MARR is 20%. Which one do you think will accept my offer? Of course Tom!
Now you can see why MARR is personal. Everybody has a different job, business or offer and according to those they will find their MARR.
One more important thing!
You don’t necessarily need to do the offer that makes your MARR! You just have to have it. Let me show you what I mean by that:
If you have an opportunity like giving your money to someone else for 30% of profit each year and you have no better option, that means your Minimum Acceptable Rate of Return is 30% even if you are NOT doing it! That makes sense, doesn’t it? Because if you do some business with less than 30% you could simply take the 30% option and have more profit. So doing some business with less than your MARR is NOT wise.
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