07-20-2010, 09:22 PM
O level ki accounting krtay krtay direct Strategic Financial Management main kahan ja ghusin? -)
Hurdle Rate.
Hurdle rate is the minimum rate of return on a project a manager or company is willing to accept before starting a project, given its risk and the opportunity cost of forgoing other projects. Other name are, Minimum Acceptable Rate of Return MARR, Minimum Attractive Rate of Return, Required Rate,
Nominal Hurdle Rate
Nominal rate refers to the rate of interest before adjustment for inflation.
Real Hurdle Rate
The "real rate" is approximately the nominal interest rate minus the inflation rate.
Inflation Rate
Inflation rate is a measure of inflation, the rate of increase of a price index.
So, lets take an example
You have Rupees 1,000 and deposited in to the bank account for a period of one year. your required rate of return (Real Hurdle Rate) is 10% p.a and inflation rate in Pakistan is 15% p.a. what will be the calculation.
Principal Rs 1,000
Real Return @ 10% Rs 100
Total Rs 1,100
Now in this situation you have received your required return as well as your principal but you have not taken the impact of inflation in the country, your purchasing power have been reduced or price level of commodities has been increased by 15& (Inflation Rate).
So, in above situation 10% is real return not a nominal return in order to calculate nominal return we will incorporate impact of inflation first then we will calculate our return e.g
Principal Rs 1,000
Inflation @15% Rs 150
Adjusted Principal Rs 1,150
Real Return @ 10% Rs 115
Total Rs 1,265
So, in order to get Rs 1,265 in future by investing Rs 1,000 your required rate before adjustment of inflation rate should by 26.5% (Nominal Hurdle rate).
Is it okayyyyy?
Hurdle Rate.
Hurdle rate is the minimum rate of return on a project a manager or company is willing to accept before starting a project, given its risk and the opportunity cost of forgoing other projects. Other name are, Minimum Acceptable Rate of Return MARR, Minimum Attractive Rate of Return, Required Rate,
Nominal Hurdle Rate
Nominal rate refers to the rate of interest before adjustment for inflation.
Real Hurdle Rate
The "real rate" is approximately the nominal interest rate minus the inflation rate.
Inflation Rate
Inflation rate is a measure of inflation, the rate of increase of a price index.
So, lets take an example
You have Rupees 1,000 and deposited in to the bank account for a period of one year. your required rate of return (Real Hurdle Rate) is 10% p.a and inflation rate in Pakistan is 15% p.a. what will be the calculation.
Principal Rs 1,000
Real Return @ 10% Rs 100
Total Rs 1,100
Now in this situation you have received your required return as well as your principal but you have not taken the impact of inflation in the country, your purchasing power have been reduced or price level of commodities has been increased by 15& (Inflation Rate).
So, in above situation 10% is real return not a nominal return in order to calculate nominal return we will incorporate impact of inflation first then we will calculate our return e.g
Principal Rs 1,000
Inflation @15% Rs 150
Adjusted Principal Rs 1,150
Real Return @ 10% Rs 115
Total Rs 1,265
So, in order to get Rs 1,265 in future by investing Rs 1,000 your required rate before adjustment of inflation rate should by 26.5% (Nominal Hurdle rate).
Is it okayyyyy?
