In the past, the Company had used a hurdle rate, a targeted yield.
Hurdle rate = our cost to raise capital
+ desired return + a fudge factor
In English, a project would be accepted if it covered its capital expense
plus the return the owners' wanted plus a little more to
cover the risk from loses from other products that were unsuccessful,
rate = 10% + 7% + 1%
A project would
need to equal or best an 18% return per year.
Her first observation. During the growth phases, a discount rate of
18% would "screen
that would make more than
the cost of financing at 10% but less than the hurdle rate.
positive NPVs are good, negative NPVs are bad.
Discount Rate Considerations
Cost of Capital