Hurdle Rate Research Articles

Enabling role of policies to make public charging infrastructure development viable in an Indian city: A modelling-based analysis

The present paper is concerned with shedding light on the financial viability of setting up public charging infrastructure in a range of implementation situations in an Indian city and the possible role of policies and regulations to make charging business attractive. The nascency of the electric mobility sector and its fast-evolving technological landscape along with possibility of different charging use-cases make it difficult to templatize the financial evaluation of charging business. With the help of a publicly available peer-reviewed financial tool which has been specifically developed to analyze the possible financial outcome of an investment in public charging infrastructure for electric vehicles (EVs) in Indian context, the study examines the business attractiveness of setting up a public charging station in four unique use-cases such as charging at public parking, destination charging, on-the-go charging, and shared workplace charging. The study employs Project Internal Rate of Return as the primary financial yardstick that is being benchmarked with a hurdle rate or target rate of return to make the evaluation as objective as possible. The financial modelling aptly captures the dynamics of India’s EV charging market by considering the possible variations in charging infrastructure configuration, electricity tariffs and regulations, provision for land rental, charging fees and other such factors. It further demystifies the potential impact of key variables on a project’s business case. This research would help design policies, regulations, support mechanisms and terms of reference for public charging infrastructure projects in the country. Policymakers, implementing authorities, regulators, potential investors, and financial institutions are expected to benefit from the analyses.

What is an appropriate investment hurdle rate for commercial space resource development projects?

This article sets out to identify an appropriate hurdle rate range for commercial space resource development projects, should such an industry eventuate. There has been little consistency in the use of hurdle rates and discount rates in the evaluation of space resource projects proposed to date. The article uses two approaches to determine an appropriate hurdle rate for the economic evaluation of such projects. Firstly, the article reviews hurdle rate usage in three industries with parallels to a potential space resource industry – the mining industry, the oil & gas industry, and the aerospace industry. The venture capital sector is also considered. The article finds that there is limited direct reference to the hurdle rates used in these industries and therefore uses expected project IRR and corporate Cashflow Return on Investment (CFROI) as proxies to quantify hurdle rates in each industry. Secondly, the article develops a Risk Build Up Method (RBUM) to determine appropriate hurdle rates for hypothetical commercial space resource development projects by quantifying the potential commercial risk to which such projects could be exposed. The RBUM process correlates a commercial risk score quantified on a project by project basis with a hurdle rate risk premium scale to determine an appropriate hurdle rate for such projects. Finally, the article discusses discount rate treatment in the analogue industries, with a view to proposing a consistent approach to the use of discount rates in a potential space resources industry. The article finds that hurdle rates in the range of 25% could be appropriate for potential commercial space resource development projects, depending on the perceived risk of the project, and assuming a suitable legal/regulatory regime is in place. This hurdle rate range and the RBUM process could evolve over time should such an industry eventuate and ultimately mature. The article also proposes that a ‘standard’ industry discount rate of 10% be utilised in order to facilitate the comparison of project to project valuations, based on the discount rate convention for reporting requirements in the US oil & gas industry.

Risk Assessment Analysis of Hybrid Renewable Energy Systems in Remote Areas: Case Study of Domadgee, Australia

This study comprehensively analyses the energy requirements and options for Doomadgee, a remote indigenous community in Australia. Currently, the electricity provider relies on a 2.44 MW diesel power generator, resulting in high operational costs and carbon emissions. This study explores transition options to renewable energy sources to address these challenges while ensuring reliable and cost-effective power supply. This study suggests utilising a 2.4 MW wind energy source, a 1.2 MW solar energy source, and a 4 MW battery storage system that can last 8 hours. This configuration aims to reduce diesel consumption, optimise the internal rate of return (IRR), and establish a sustainable energy mix with low capital expenditure. The wind and solar capacities recommended for Doomadgee also consider seasonal fluctuations, such as wet and dry seasons in energy demand, ensuring efficient power production all year round. The study commences with the development of a risk matrix to determine the hurdle rate. The next step involves conducting ten distinct scenarios to evaluate the investment's financial feasibility, considering various variables such as wind, solar, equipment, and battery storage capacities. Sensitivity analysis also determines the most significant factors impacting financial valuation. This analysis provides valuable insights that can aid in the decision-making process.

Real Estate Development Feasibility and Hurdle Rate Selection

Real estate developers typically assess potential projects using feasibility analyses and industry-standard heuristics, which include capital costs, return on costs, and a subjective risk measure. This study explores real estate developers’ decision-making practices in selecting hurdle rates and common feasibility analysis techniques, surveying 225 Australian and New Zealand developers. The main findings are that most developers use specific ‘go/no-go’ hurdle rate mechanisms irrespective of primary real estate type, with the majority using margin on development cost (MDC) or internal rate of return (IRR); the boundaries between traditional speculative development and real estate investment through the use of securitization methods have become blurred; many developers use both quantitative metrics, with qualitative methods and specific structural checks to manage the risks involved; and the two most frequent methods of determining site value prior to acquisition are the residual land value and discounted cash flow methods. Most place a heavy reliance on industry-accepted heuristics and do not have a predetermined process and method for altering or adapting the chosen hurdle rates and benchmarks. This research provides a contribution to property development practice from the Antipodean perspective which until now has been more focused on the UK view, enabling more generalized application internationally.

How does currency risk impact firms? New evidence from bank loan contracts

We use unique features of the private credit market to examine if and how currency risk impacts firms' financing and whether currency risk is a priced systematic risk at the firm level. We find that currency exposure has a large impact on loan spreads. Decomposing loan spreads, we find that exposure increases the expected default loss premium and that internationalization, growth opportunities, and relationship intensify exposure's impact. Further, exposure exacerbates firms' financing risk by increasing the need for collateral, reducing loan maturity, inducing monitoring and covenant intensity, and influencing syndicate structure. However, exposure does not affect the expected return premium in loan spreads; hence, currency risk does not appear priced in the classical sense and, therefore, should not affect the “true” cost of debt. Our findings imply that while managers should be concerned about exposure's impact on their access to, and terms of, bank financing, they should not adjust hurdle rates on account of exposure when assessing investment projects.

Adapting to uncertainty: Modeling adaptive investment decisions in the electricity system

The electricity system is undergoing a rapid transformation, with the decisions of investors significantly shaping not only the future supply mix of the system, but also dictating the pace of this transition. Given the sector's inherent complexities and uncertainties, investors are actively adapting their strategies to respond to evolving investment conditions. Effective policy design for low-carbon transition hinges on an understanding of these investment decisions. Traditional energy system models, however, often default to a simplistic view of static investment behavior, falling short of capturing the dynamics of adaptive decision-making. In response to these challenges, our study underscores the necessity of integrating adaptive investment decisions into energy system modeling. We introduce a novel approach to model investment decisions that accommodate the dynamic nature of hurdle rates, the uncertainties tied to the economic performance of various power plant technologies, and differences in investors' levels of loss aversion. While conceptual, the model's scale is comparable to the electricity market of a country such as Germany. Our findings underscore the differences in investment decisions among adaptive and non-adaptive investors. In adaptive scenario, agents initially invest more in wind and solar technologies, but less in later years compared to the no-adaptive case. Furthermore, adaptive agents with less aversion to losses show higher equity values, but also face increased bankruptcy risks. By enhancing our modeling approach to incorporate heterogeneity in adaptive investment decisions, this study aims to contribute to the ongoing discourse on low-carbon energy transition and further development of energy system models.

Project Development with Delegated Bargaining: The Role of Elevated Hurdle Rates

Project Development with Delegated Bargaining: The Role of Elevated Hurdle Rates

Building upcycling vs. building reconstruction investment decisions: a focus on the discount rate

This work continues the methodological exploration illustrated in a correlated contribution presented by the Authors to this Symposium. In this advancement, the focus is on selecting the appropriate discount rate for the NPV calculation, evaluating alternative scenarios in the building construction sector. Assuming the presence of environmental and financial input variables in the DCF model, a “time preference” discount rate seems inappropriate. Thus, as an alternative, the environmental hurdle rate technique is explored. This is based on using different rates considering the negative contribution to the environment due to an input variable or, conversely, considering the technological development expectations toward energy consumption and CO2 emissions reduction over time. Simulations on two alternative scenarios are implemented: the retrofit scenario and the demolition and reconstruction scenario of an existing residential building. The results confirm the importance of the discount rate capability in influencing the DCF model output, even more in the presence of environmental input, highlighting their weight on increasing the asset residual value. Further, the environmental hurdle rate can perturb the final scenario ranking toward environmentally responsible investment decisions at different scales.

IPOs as Catalysts for Retail Investor Wealth Creation: Evidence from the Indian Stock Market

The study delves into the dynamics of wealth creation for retail investors in the context of Initial Public Offerings (IPOs) within the Indian equity markets. Against the backdrop of a burgeoning retail investor base, the research offers a comprehensive analysis spanning April 2012 to December 2022, evaluating short-term and long-term IPO performance metrics. The study reveals nuanced insights into wealth creation dynamics by scrutinizing listing day returns, first-week to third-year returns, and market-adjusted returns vis-à-vis the Nifty50 Index. Notably, the research suggests that while IPOs exhibit promise with positive listing day returns, sustaining growth over extended horizons poses challenges. The hypothesis of inflation serving as a pragmatic hurdle rate for retail investors is explored, offering a novel perspective on wealth preservation. It also sheds light on the significant variability in the Real Rate of Returns (RRRs) among IPOs, with some contributing to wealth generation while others result in wealth erosion. This underscores the importance of retail investors carefully assessing and managing risks, emphasizing the need for prudent portfolio diversification and effective risk mitigation strategies, particularly over longer investment horizons.

Energy efficiency investment in Swiss industry: Analysis of target agreements

Slowing down the energy efficiency (EE) improvement rate over the past half a decade and relatively low EE-related investments highlight a need for a more targeted approach to encourage EE improvement investment in the Swiss manufacturing sector. The current work is based on an analysis of already implemented energy efficiency measures (EEMs) via target agreements. Four segments of the Swiss manufacturing sector are identified using the K-means clustering based on the energy consumption profiles of the establishments. The EEMs are categorized through text analysis with the help of a machine learning algorithm. The EEMs are ranked using two indicators that can inform different stakeholders: i) EEMs with Internal rates of return well above the reported risk-adjusted hurdle rates are identified for each segment to help industrial decision-makers take ad-hoc, profit-based investment decisions on EE improvement. ii) Levelized costs of saved energy are presented as value ranges for the EEMs that have the largest impact on annual total final energy (TFE) reduction for each segment to help policymakers design a more targeted approach for the promotion of high-impact EEMs. EE system improvements such as insulation of steam systems and process optimization, as well as EE equipment improvements like process equipment insulation, installation of variable frequency drives (VFDs), smart controls, and IE3 motors, were found to be the most profitable options across all clusters. For the electricity cluster, CHP was found to be the most impactful way of EE improvement (high energy savings) but not cost-effective. For fuel-consuming clusters, waste heat recovery measures were found to be the most cost-effective and among the most impactful options for EE improvement, along with fuel substitution measures with varying degrees of cost-effectiveness.

The effect of cutting interest rates on corporate investments: A real options model

AbstractWe propose a real options model with regime shifts to investigate the effect of cutting interest rates on corporate investments when a financial crisis occurs. Cutting interest rates would lower the investment project's hurdle rate. The reduction in hurdle rate is positively related to the magnitude of interest rate cuts and the persistence of the financial crisis. The hurdle rate becomes lower in the financial crisis state because the reduction in interest rate would lower the cost of capital and the opportunity cost of immediate investment. In the numerical analysis of this study, we show that the change in the opportunity cost accounts for most of the change in the hurdle rate. Upon taking into consideration the firm's financing constraints, we find that cutting interest rates accelerates investments for firms with high liquidity. However, for firms with low liquidity, the optimal investment threshold is not affected by the variation in interest rates. Instead, the investments of low‐liquidity firms are affected by the change in the friction of credit supply.

The impact of intrafirm incentive conflicts on the interplay between tax incidence and economic efficiency

AbstractWe study how corporate taxation interacts with intrafirm incentive conflicts between shareholders and managers and how this interaction impacts the firm's economic decisions and outcomes. In our model, investment under asymmetric information facilitates entrenchment and rent extraction by the privately informed manager. We show that when the future investment payoff is exogenous, a corporate tax cut increases managerial rents, reduces pre‐tax investment profitability, increases the firm's optimal investment hurdle rate, and reduces investment. When the manager can exert upfront project development effort to increase the expected investment payoff, a tax rate reduction not only encourages more effort but also leads the firm to increase the investment hurdle rate to curtail rents. In equilibrium, a lower tax rate always benefits the manager, but the sensitivity of the project's return to the manager's effort determines whether the firm will increase or decrease investment in response to a tax cut, and whether the firm's resulting pre‐tax profit will increase or decrease. Overall, our study shows that intrafirm incentive conflicts can be an important factor in the interplay between tax incidence and economic efficiency, two central themes in corporate tax policy debates.

Investment Project Analysis of a Medium Range (MR) Tanker Ships Purchase in an Attempt to Maintain the Economic Productivity of the Company (Case Study: PT XYZ)

PT. XYZ is a spin-off charter out business of its host company that specifically focuses on providing charter out services in the shipping industry. This research was carried out in response to the requirement to rejuvenate the vessels owned by PT XYZ taking into consideration the age of the ships. In total, there will be 7 ships that was used as an object of this research, considering the replacement program options of either acquiring newbuild vessels or secondhand ships. Newbuild Ship investment will use a 9.09% hurdle rate, including the weighted average cost of capital (WACC) of 7.09% and a risk premium of 2% in the analysis. This hurdle rate will be used as comparative data to the required rate of return for the related project (IRR>Hurdle Rate). There is a total of 2 ship in the overall project that will be replaced with a newbuild ship, Project 1 and Project 2. These investment projects will be conducted from 2024-2026 period. The capital structure for newbuild projects consisted of 75% debt and 25% equity. Secondhand ship investment will use an 9.59% hurdle rate, including the weighted average cost of capital (WACC) of 7.09% and a risk premium of 2.5% in the analysis. There is a total of 5 ships in the overall project that will be replaced with secondhand ship, Project 3-7. These investment projects will be conducted from 2024-2026 period. The capital structure for secondhand projects consisted of 75% debt and 25% equity. Based on the financial assessments of the projects, the findings consistently demonstrate positive results. As a result, it can be inferred that the seven projects are both viable and feasible to undertake. The primary objective is to guarantee that these projects make a positive contribution to the company’s economic productivity.

Understanding the Firm Specific Risk Premium

Abstract We seek to determine whether a firm specific risk premium (FSRP) exists for private firms. We show that private equity investors price firm specific risk as part of establishing the expected rate of return hurdle rate. Our research is based on survey data constructed by the Private Capital Markets Project. We decompose the rate of return into its component parts-market risk premium, size premium, liquidity premium and firm specific risk premium (FSRP). We find that on average PE FSRP varies between zero and six percent. These findings indicate that the cost of capital buildup used in valuing private firms should include a premium for firm specific risk unless facts and circumstances suggest otherwise.

The Discount Rate in the Evaluation of Project Economic-Environmental Sustainability

The debate about project economic sustainability evaluation from a life cycle perspective focused on the conventional Life Cycle Costing (LCC). Despite the potentialities of the approach for evaluating design options at different scales (building/system/component/material), some limits emerge due to the neoclassical nature of the economic principles on which it is founded. The most important aspect of this debate is the necessity to clarify how to deal with environmental costs in the calculation, particularly in the case of public/PPP interventions. Two research topics emerge for strengthening the capability of LCC to deal with environmental components: (1) the LCC and environmental quantitative analysis (using Life Cycle Assessment) joint application; (2) the integration of the environmental dimension into the microeconomic approach, using appropriate discount rates. As known, these last are particularly relevant for public projects, in which the time value of money issue becomes crucial in presence of long lifespan analyses and economic objectives. Thus, the purpose of this paper is to explore alternative discounting modalities, for identifying the preferable one, towards an “environmental LCC model”. The research domain is therefore on the limits of LCC in dealing with environmental cost components, at the time being poorly studied by the scientific literature: this point represents the missing link which form the basis for the research problem to be addressed. The research design is focused on the investigation of environmental hurdle rate technique and the escalation rate approach, as alternatives to the standard “time preference” (financial) one. The LCC and the global cost are selected as the main tool for the analysis, which is founded on an empirical research methodology. The results, obtained by simulations on a case study (two alternative technological components), confirm the relevance of the discount rate effect on the Global Cost calculation by modelling some of the potential impacts of building components on the environment, e.g., the expectations of technological development over time. By the environmental hurdle rate, the results can even change the final preferability ranking obtained using financial rates. The value of the work consists of growing the debate on the topic and supporting environmentally responsible investment decisions in the building construction sector (new-build/retrofit of existing assets).

Project Development with Delegated Bargaining: The Role of Elevated Hurdle Rates

Project Development with Delegated Bargaining: The Role of Elevated Hurdle Rates

Evaluating energy financing considerations and sustainable energy innovation with the role of financial development and energy development.

The purpose of the study is to test the role of energy development in energy financing considerations for sustainable energy innovation and financial development. To achieve the study objective, a fuzzy decision-making modeling technique is applied. The results revealed that bank loans are now the main source of financing for innovation and creativity in Chinese business entities. Project-based financing might be replaced with collaborative and sustainable energy innovation (CSI), warranting energy development. Moreover, green financing loan schemes invest both public and private funds in sustainable energy innovation to capitalize on financial development through sustainable energy innovation. The consideration and application of financial consideration for sustainable energy innovation-financing projects or companies are limitless. Providing for screening energy development cooperation proposals with small financial payback hurdle rates might have large opportunity costs. There may be a case for governments to increase industrial growth, improve resource efficiency, and increase factor productivity while tackling climate change. Economic growth in China may have an even greater influence on environmental sustainability than in other countries. On such points, there is a need to pay the attention. If the suggested policy suggestions are implemented successfully, they would help to enhance the scope of financing considerations for sustainable energy innovation to uplift financial development through energy development mechanisms at the corporate level.

Determining the costs, revenues, and cost-share payments for the “floodwise” program: Nature-based solutions to mitigate flooding in eastern, rural North Carolina

FloodWise is a pilot project that proposes innovative new approaches for flood disaster resilience by applying nature-based solutions (NBS) in Eastern North Carolina to control water runoff for brief periods after major storm events. We collected production and cost data from primary or secondary sources and used discounted cash flow and capital budgeting procedures at a 6% discount rate for NBS practices to estimate the amounts of payments necessary for farmland owners to break even to adopt NBS practices. Conventional crop farming was profitable already on suitable lands and served as the business as usual (BAU) case to compare to selected NBS practices. Warm-season pasture, loblolly pine forests and agroforestry, and no-till farming exceeded the 6% hurdle rate. Other conventional farm practices of hardpan breakup, cool-season pastures and trees, and bottomland hardwoods would require total payments of up to $600/acre to break even at 6%. Modifications of existing conservation practices, such as stream buffers, cover crops, silvopasture, and tile outlet terraces and tiling, fell in the second tier of total costs of up to $1,512/acre. Major NBS projects that required substantial earthmoving and flood control structures were more expensive - $3,734/acre for water farming (i.e., retention) with berms, $13,252/acre for a forest wetland bank, and about $88,000/acre for a major flood control wetland - and would displace most of the existing area for farm and forest management. However, larger floodwater structure projects could store more water for more extended periods; these storage quantities and benefits need to be assessed in future research.

Portfolio Management Services in India: Returns and Incentives

On the back of booming equity markets and falling interest rates, Indian high net worth investors have flocked to Portfolio Management Services (PMS) funds in India with substantial assets under management of INR 18,07,939 crores. However, there is scant academic literature on the performance of PMS funds in India which charge high fees compared to passive index funds. The purpose of this study is twofold. First, describe the performance of PMS funds in India as compared to their respective benchmark. Secondly, review the incentives fees structure of PMS funds and recommend regulatory changes needed to address the shortcomings. The principal results indicate that majority of PMS funds have failed to outperform the benchmark in the short-term and medium-term periods. In the long-term period, however, largely PMS funds have beaten the benchmark returns. The implications of this study are two-fold in the Indian market context. First, high net worth individuals in India must invest via PMS funds only if their investment time horizon is at least ten years. For the short to medium-term, it will be better to invest in index funds due to their meager expense ratio and returns, which are like the benchmark indices. Second, Indian policymakers must increase the minimum hurdle rate based on which the variable performance fee is charged to ensure portfolio managers are rewarded if they generate abnormal risk-adjusted returns. This study contributes to academic literature by focusing on the performance and incentives of PMS funds market in India, which is largely unexplored till now.

Efficient Spread Betting Markets: A Literature Review

Are simple trading strategies profitable? It is a question that has been on the minds of academics and practitioners for decades. In this paper, we review the longstanding literature on trading strategies in spread betting (also known as handicap betting), a popular sports betting microstructure. We review over 600 strategy implementations and find that market efficiency and systematic misperceptions are not mutually exclusive per se. Predictable glitches occur, but they are too small to be profitably exploited which is consistent with efficient markets. Furthermore, while controlling for data mining issues is becoming mainstream in finance, it has not yet made its way into this literature. We provide evidence that the hurdle rate of | z| > 3 which has been put forward in the broader finance literature should also be used in betting market research.