How to set the hurdle rate for capital investments.
In: Stauffer, D., ed.
Qfinance: The Ultimate Resource.
A & C Black, pp. 322-324.
Publisher's URL: http://QFINANCE.com
• There exists a wide range of approaches to setting the hurdle rate for capital investments.
• It is essential that we do not set the hurdle rate too high, thereby foregoing valuable investment opportunities, or too low, thereby destroying value for shareholders.
• Whilst academics tend to advocate a series of at times complex adjustments, most CFOs settle for a relatively simple approach and allow for complexity instead in their cash flow projections.
• The most common approach is to employ a CAPM-based equity cost as an input to a WACC calculation.
• A company-wide hurdle rate is typically employed by companies, though adjustments are made for projects of atypical risk.
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