Identify methods that firms use to establish hurdle rates for capital

Identify methods that firms use to establish hurdle rates for capital projects.

What will be an ideal response?

ANSWER

Firms use many techniques to establish hurdle rates. First, if they have multiple and distinct business divisions, they may use industry averages for that type of business. Or, they may have historical reference points whereby they can estimate risk and use that to establish a required return. Some firms establish risk and a hurdle rate on a project by project basis. Other firms create “risk buckets” with hurdle rates and place projects into the appropriate bucket based on perceived risk.