• There exists a wide range of approaches to setting the hurdle rate for capital investments.
• It is essential that we do not set the hurdle rate too high, thereby foregoing valuable investment opportunities, or too low, thereby destroying value for shareholders.
• Whilst academics tend to advocate a series of at times complex adjustments, most CFOs settle for a relatively simple approach and allow for complexity instead in their cash flow projections.
• The most common approach is to employ a CAPM-based equity cost as an input to a WACC calculation.
• A company-wide hurdle rate is typically employed by companies, though adjustments are made for projects of atypical risk.
Tucker, J. (2009). How to set the hurdle rate for capital investments. In D. Stauffer (Ed.), Qfinance: The Ultimate Resource, 322-324. A & C Black