Several managers suggested that the company's financial analysts should add 0.5% to the hurdle rate when calculating the IRR of any investment opportunity to provide an added margin of safety and reduce their performance pressure. What would this action do?

Question

Quizplus · Accepted Answer

Adding 0.5% to the hurdle rate would make it more difficult for investment opportunities to meet the minimum required rate of return. As a result, otherwise acceptable projects may be rejected, leading to a reduction in shareholder wealth. It does not improve shareholder wealth by reducing risk, accepting otherwise unacceptable projects, or increasing the percent return of projects. The added margin of safety may reflect the added risk perceived by the company's managers, but it does not necessarily improve shareholder wealth.

Several Managers Suggested That the Company's Financial Analysts Should Add