75% of the retailers surveyed said they were raising the required hurdle rate
for real estate capital remodels and relocates, and a number described how were planning to defer or cancel the projects that did not meet their more stringent internal rates of return guidelines.
Keywords: capital budgeting; empire-building; residual income; hurdle rates
Consistent with prior expectations, we found self-set hurdle rates
to be an effective control mechanism resulting in significantly lower levels of escalation of commitment.
Figure VI shows the bandwidth of hurdle rates
that still pick 90% of the enterprise value.
However, it is still useful to look at the average information, since it emphasizes the four-dimensional nature of the problem of setting hurdle rates
as a function of stage, namely variations in stage time, magnitude of investment, changing interest rate structure or cost of capital, and finally risk profile.
- the minimum rates of return needed to justify an investment - are typically established at senior management levels within an organization, and tend to remain fairly static in the near term, although they can change over time to reflect changes in general economic conditions or industry trends.
At first blush, an increase in hurdle rates
would seem to do little to conserve on internal funds.
In addition to clearing our hurdle rates
, the bid packages for these properties offered investor safeguards, including a management contract that effectively provided a revenue floor; an allowance for renegotiating union and other existing contracts; and provisions for protection against currency fluctuations and for the repatriation of profits.
companies still use hurdle rates
of 12% or more to justify capital investments, according to a survey of 612 companies conducted by the Institute of Management Accountants (IMA).
This result provides a potentially testable prediction regarding cross-sectional variation in firms' choices of hurdle rates
for approval of capital investment projects.
MECO does not have specific hurdle rates
to exceed when considering new products or investments.
Investments are made under conservative financial guidelines and hurdle rates
and are funded with internal cash.