The minimum acceptable rate of return (MARR), also called the minimum attractive rate of return or the hurdle rate, is the lowest rate of return that makes a project worth doing. Project IRRs below MARR are rejected; project IRRs above MARR are accepted (subject to other constraints).
MARR is set by the organisation, not by the project. It reflects:
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Cost of capital. Money has to come from somewhere — debt (loans, bonds) at the borrowing rate, or equity (retained earnings, share issuance) at the rate equity investors demand. The weighted average cost of capital (WACC) blends these in proportion to the firm’s capital structure. Any new project that returns less than WACC is destroying value.
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Opportunity cost. If money is sitting in an alternative use earning 8%, a new project has to clear 8% just to be neutral. That alternative-use rate is part of MARR.
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Risk premium. Real projects involve uncertainty. The base hurdle plus an additional risk premium gives a project-specific MARR. Riskier projects (new markets, untested tech) carry higher MARRs than routine maintenance projects.
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Strategic priorities. Some firms artificially raise MARR when they want to slow growth (capital rationing), or lower it for strategic must-have projects.
In practice, an organisation typically publishes a single MARR (or a small set tied to project risk class) and uses it across all evaluations. A 10-15% MARR is typical for industrial capital projects. Public-sector projects often use lower MARRs (4-7%) tied to government borrowing rates.
MARR is used as the discount rate in PW, FW, and AW calculations, and as the threshold for IRR and ERR acceptance.
MARR and taxes. When taxes are part of the analysis, the relevant MARR is the after-tax MARR, which is roughly where is the marginal tax rate. This is because the project’s returns are taxed before they’re enjoyed, so the pre-tax return required to clear an after-tax hurdle is correspondingly higher. See Corporate income tax and After-tax MARR.
MARR and inflation. Stated MARRs are usually actual (nominal) rates that include an inflation component. When working in real (constant) dollars, use the real MARR — strip the inflation out. See Real interest rate for the conversion.
For project-evaluation methods that use MARR, see Present worth method, Internal rate of return, and Comparison of alternatives.