marginal efficiency of capital

a study on marginal efficiency of capital and attached cast study on the same.

1. MARGINAL EFFICIENCY OF CAPITAL

2. SYNOPSIS Introduction Marginal efficiency of capital. Factors effecting MEC MEC and interest rates How companies maintain Capital using MEC Case study Conclusion

3. INTRODUCTION Irving Fisher was first economist to make use of concept MEC in 1920. He gave it a name Rate of return over cost. Simply MEC means “expected rate of profitability of new investment”. It’s calculation depends upon two factors mainly I. amount of profit II. cost of capital asset

4. MARGINAL EFFICIENCY OF CAPITAL The  marginal efficiency of capital  (MEC) is that rate of discount which would equate the price of a fixed  capital  asset with its present discounted value of expected income . In short, MEC is the internal rate of return of an extra unit of capital. The theory of marginal efficiency indicates that investment decisions will be influenced by: I. The marginal efficiency of capital II. The interest rates

5. MEC CURVE

6. Factors Affecting the Marginal Efficiency of Capital

7. Factors Affecting the Marginal Efficiency of Capital The cost of capital: If cheap capital is available for investment, then investment opportunities become more attractive.

8. Factors Affecting the Marginal Efficiency of Capital 2. Demand for goods and services If tastes and preferences change and demand for a good increases, then the increased demand is likely to increase profitability. 3. The marginal rate of tax If the marginal rate of tax is increased then the net return on an investment will fall, reducing the marginal efficiency of capital. 4 . The availability of finance Restrictions on lending will limit investment. A relaxation of credit controls will make investment easier.

9. Factors Affecting the Marginal Efficiency of Capital 5. Expectations and confidence If people believe that growth in economy is slowing and unemployment may rise in the foreseeable future, then demand in the economy may contrast . 6. Technological change Innovation in products or processes may increase the potential size of the market or help to drive down costs.

10. MEC AND INTEREST RATES An investor while taking an investment decision makes a comparison between MEC and rate of interest. when ROI is less than MEC (ROI<MEC) investor make more investment. When ROI is more than MEC (ROI>MEC) no investment will be made. When ROI is equal to MEC (ROI=MEC) investor stop making any more investment.

11. HOW COMPANIES MAINTAIN CAPITAL USING MEC EXAMPLE: Suppose the price of machine is 30000.Duration of life of machine is 10 years, expected income during this period is 60000. NOW Total Profit of machine is 60000-30000= 30000 Average profit per year - 30000/10 = 3000 MEC = 3000/30000 *100= 10%

12. CASE STUDY This is case is about Nike which is a popular brand in sporting apparel division. Nike generated 2.81billion$ in operating income on revenue of 20.9billion$ in FY 2014 end of may. Nike planning on expansion in to fashion apparel segment. 2.5billion$ is capital investment (marginal capital) they are going to invest. Expected market share will be at 2% in first year. Gross profit margins are expected to be a 23% of revenues. Total time period is 12 years. Nike has used MEC for taking decision on expansion plan investment .

13. CONCLUSION

14. THANK YOU !!!