The minimum rate of return on a project / investment a company set for project screening. This allow companies to make decision on whether to pursue a specific project.
Usually is a function of the company’s weighted average cost of capital (WACC) and the risk premium.
This involves the cost of capital (funds). Consider
- cost of debt (interest on loan)
- cost of equity (dividends paid to shareholders)
Management’s prerogative to include risk premium from country and other perceived risks.
A risk premium is assigned to a potential investment to denote the anticipated amount of risk involved. The risk premium may be either positive of negative – negatives rate help offset other factors that lessen the appeal of an investment if the risk is not so low.