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Shikha Agarwal
Member
Ques 11 (ii) part.. why they have used 12% for discounting when hurdle rate is 8%??
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Simon James
Senior Member
HI - I'm not sure what question paper you are referring to (UK exam??), but a hurdle rate is not used for discounting. A hurdle rate is a test or target rate. You calculate the return on a project and compare it to the hurdle rate (> hurdle rate - good, < hurdle rate - bad)
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Shikha Agarwal
Member
M asking about IAI.. then at what rate do we discount?
Simon James
Senior Member
If you are using a hurdle rate, you typically calculate an IRR (ie you solve for the rate of discount) and then compare it to the hurdle.
Note that this is equivalent to discounting at the hurdle rate and seeing if the project is NPV positive. This is what they have done in this question. Note that the discount factors shown are based on 12% - but the actual numbers underlying the calculations are indeed 8% (if you use the factors stated in the solution you do not get the totals shown - you do if you use 8%)
Note that this is equivalent to discounting at the hurdle rate and seeing if the project is NPV positive. This is what they have done in this question. Note that the discount factors shown are based on 12% - but the actual numbers underlying the calculations are indeed 8% (if you use the factors stated in the solution you do not get the totals shown - you do if you use 8%)
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Shikha Agarwal
Member
Simon James
Senior Member
Hi.
I looked up the solution too. The discounting column is 12% but if you multiply the cashflows by the discount factors shown you do not get the totals in the final row. The totals are based on 8% discount factors (not shown).
Paste the cashflows into spreadsheet and try it out!
I looked up the solution too. The discounting column is 12% but if you multiply the cashflows by the discount factors shown you do not get the totals in the final row. The totals are based on 8% discount factors (not shown).
Paste the cashflows into spreadsheet and try it out!
S
Shikha Agarwal
Member
Ok.
Thanq
Thanq