Marginal Efficiency of Investment coefficient

PunkFreud

Can someone please tell me what the Marginal Efficiency of Investment coefficient is and how to get it? I've googled it, and looked up a number of books, but no luck.

I'm not going to lie, it's for a project...

Économiste Monétaire

The 'internal rate of return' on a project. Think of an investment with an initial cost, and after that you earn a stream of income, which is discounted over time by a 'discount rate'. Firms should continue to take up new projects until their MEI = market interest rate = discount rate.

http://homepage.newschool.edu/het//essays/capital/keynesreturn.htm

PunkFreud

Thanks for that, but how do I get the its coefficient?

Économiste Monétaire

PunkFreud wrote: »

Thanks for that, but how do I get the its coefficient?

What is the rate of return, r, that makes

[latex]\displaystyle C - \sum_{t=0}^{T} \frac{p_{t}}{(1+r)^{t}} [/latex]

equal to zero? Use excel to calculate r.

Économiste Monétaire

Just an example to help:

[latex]\displaystyle t \in [0,10], C = 102000, p_{t} = 12000[/latex]

[latex]\displaystyle -102000 + \sum_{t=0}^{10} \frac{12000}{(1+r)^{t}} = -90000 + \sum_{t=1}^{10} \frac{12000}{(1+r)^{t}}[/latex]

To calculate r in excel, such that the above is equal to zero, use '=IRR(values)', e.g. '=IRR(A1:A11)' = 5.6045%.