Hurdle rate and SLY: Difference between pages

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A hurdle rate is an organisation's rate of return used for determining the viability of a proposed investment or other project.
The key short-term investment principles and prioritisation of:




The hurdle rate can be used in two ways:
<b>S</b>ecurity


*As a target Internal rate of return, that proposals need to exceed.
<b>L</b>iquidity and


*As a discount rate (r) to apply in Net present value analysis, to discount the future cash flows.
<b>Y</b>ield




:<span style="color:#4B0082">'''Example 1 - Internal Rate of Return (IRR)'''</span>
This ordering of the principles and considerations is fundamentally important.


:Our organisation's hurdle rate is 7%.


:A proposal has an Internal rate of return of 5%.
The safety and security of the funds invested are always the first priority.


:The IRR is lower than our hurdle rate.
Yield is the least important of the three considerations.


:Accordingly, the proposal is rejected.




== See also ==
*[[Security]]
*[[Liquidity]]
*[[Yield]]


:<span style="color:#4B0082">'''Example 2 - Net Present Value (NPV)'''</span>
:Our organisation's hurdle rate is 7%.
:We use 7% to discount a proposal's future cash flows.
:If the Net present value is less than 0, the proposal will be rejected.
Hurdle rates are usually set with reference to the organisation's weighted average cost of capital.
This will depend on a number of factors, including currency and the risk free rate of return in the relevant currency.
Hurdle rates may be adjusted for different classes of project, with different levels of risk.
Riskier projects, or classes of project, would be allocated a higher hurdle rate.
== See also ==
* [[Cost of capital]]
* [[Discount rate]]
* [[Internal rate of return]]
* [[Net present value]]
* [[Rate of return]]
* [[Risk free rate of return]]
* [[Risk premium]]
* [[Weighted average cost of capital]]


[[Category:The_business_context]]
===Other links===
[[Category:Corporate_finance]]
*[[Media:Risk and return.pdf| The Icelandic banking saga and English local authorities, UK Audit Commission, 2009]]
[[Category:Investment]]
*[[Media:2015_06_June_-_Safety_first.pdf| Safety first, The Treasurer, 2015]]

Revision as of 19:37, 20 November 2015

The key short-term investment principles and prioritisation of:


Security

Liquidity and

Yield


This ordering of the principles and considerations is fundamentally important.


The safety and security of the funds invested are always the first priority.

Yield is the least important of the three considerations.


See also


Other links

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