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The Basics

DCF Key Questions

Combine Action Plans

Key Points

Hurdle rate

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, a buffer.

Example of two NPVs, one with the discount  rate as the hurdle rate and the other with the discount rate as the interest rate to raise the funds       Hurdle 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 out" projects that would make more than the cost of financing at 10% but less than the hurdle rate.

Remember, positive NPVs are good, negative NPVs are bad.

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