Hurdle Rates For Overseas Operations

An operation’s cost of capital is a concept that is central to valuation, investment (and divestment) decisions, measures of economic profit, and performance appraisal. Finance theory says that managers should apply a different cost of capital, or hurdle rate, to different operations based on risk. Applying this idea in global finance suggests that a company’s managers should apply different hurdle rates to operations in different countries. As a case in point, Dan Cohrs, then vice president and treasurer at the telecommunications company GTE Corporation, said in 1996 that GTE did in fact set different hurdle rates for the company’s projects in different countries.1

Although no single best practice ...

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