After 15 years of employment in the airline industry, John started his own company to use physical and computer simulation in the analysis of commercial airport accidents on runways. He estimates his average cost of new capital at 8% per year for physical simulation projects, that is, where he physically reconstructs the accident using scale versions of planes, buildings, vehicles, etc. He has established 12% per year as his MARR. (a) What (net) rate of return on capital investments for physical simulation does he expect? (b) John was recently offered an international project that he considers risky in that the information available is sketchy and the airport personnel do not appear to be willing to cooperate on the investigation. John considers this risk to be economically worth at least an added 5% return on his money.
What is the recommended MARR in this situation, based upon what you have learned in this chapter?
How should John consider the required return and perceived risk factors when evaluating this project opportunity?
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