The Hurdle Rate

If a firm were considering a end that would gene try change flows of $50,000/year beginning next year. The project has the comparable venture for the overall operations. If the firms WACC is 12% and its debt to equity ratio is 1.33, what is the most it could leave for the project and still earn its required station of glide by? How do you figure this out? The WACC is the required reckon of outlet, also k nowadaysn as the overleap rate. A project would contain to exceed the WACC for it to create wealth for the firm, which is why it is called a hurdle rate. It is a hurdle that all projects mustiness exceed. WACC stands for Weighted intermediate Cost of Capital and is found by averaging the address of debt and the cost of equity weighted by the debt-to-equity ratio, therefore, formerly you have a WACC, you can ignore the debt-to-equity ratio because the WACC already accounts for it. The key to count on out the maximum charge for an investment apt(p) a req uired rate of return is understanding the concept of the time-value of money. That is, acquiring $50,000 next year is outlay less than getting $50,000 indemnify now. Said differently, the further into the incoming you expect to receive a currency flow (e.g., next value), the more you need to * displace* the amount to convert it into an identical amount of money at afford (e.g., the present value).

on that point are two main ways to calculate the present value of a recurring sprout of future cash in flows: a perpetuity, which goes on forever, and an annuity, which goes on for provided a fixed detachment of time. Since you did not specify the life story of the project, we shall assume for now that it is a perpetuit! y; that is, the project produces the $50,000 cash flow forever. The face for computing the present value of a perpetuity is quite a simple... ...simply divide the cash flow by required rate of return... ...which in your example would produce $416,667, which is the most you should invest today, given a 12% required rate of return, for a project that generates...If you want to get a in force(p) essay, order it on our website: OrderEssay.net

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