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Marginal Efficiency of Investment coefficient

  • 03-04-2010 8:24pm
    #1
    Registered Users, Registered Users 2 Posts: 308 ✭✭


    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...


Comments

  • Closed Accounts Posts: 2,208 ✭✭✭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


  • Registered Users, Registered Users 2 Posts: 308 ✭✭PunkFreud


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


  • Closed Accounts Posts: 2,208 ✭✭✭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.


  • Closed Accounts Posts: 2,208 ✭✭✭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%.


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