Hurdle rate MBA

[pooja]

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Hello sir, what is Hurdle rate for MBA? I want to know about Hurdle rate MBA? Please provide me detail about Hurdle rate MBA?

[pawan]

The biggest hurdle in opting for a good MBA/PGDM programme from a top rated B-school is its high fee structure.

You need 10 to 20 lakh Rupees to complete your 2 year MBA/PGDM course whether from IIMs or non-IIMs.

Study of MBA is provides in capital budgeting, hurdle rate is the minimum rate that a company expects to earn when investing in a project.

The hurdle rate is also referred to as the company's required rate of return or target rate.

The hurdle rate is used to discount a project's cash flows in the calculation of net present value.

The minimum hurdle rate is usually the company's cost of capital (a blend of the cost of debt and the cost of equity).

The hurdle rate will be increased for projects with greater risk and when the company has an abundance of investment opportunities.

Typical values:

Traditional inflation-free rate of interest for risk-free loans: 3-5%
Expected rate of inflation: 5%
The anticipated change in the rate of inflation, if any, over the life of the investment: Usually taken at 0%
The risk of defaulting on a loan: 0-5%
The risk profile of a particular venture: 0-50% and higher

Formula:

Capital asset pricing model is applied to estimate the risk-adjusted hurdle rate for a project.

Risk-adjusted discount rate = risk free rate + project beta * (average return risk free return)

Risk free rate is the rate on a theoretically risk free investment. Return on long-term government securities provides a good approximation of the risk free rate.