Asked by Grant Messenger on Jun 26, 2024
Verified
For projects financed from borrowed funds,the hurdle rate must exceed the interest rate paid on the borrowed funds.
Hurdle Rate
The minimum acceptable rate of return on an investment, used as a benchmark to assess its financial viability.
Borrowed Funds
Money obtained through loans or debt financing, which needs to be repaid over time, usually with interest.
- Understand the necessity of a hurdle rate surpassing the interest rate for projects financed through borrowed funds.
Verified Answer
YR
Yakelin Rodriguez-AgueroJun 27, 2024
Final Answer :
True
Explanation :
This is because if the hurdle rate (required rate of return) is less than the interest rate paid on the borrowed funds, then the project will not generate enough returns to cover the borrowed funds and still earn a profit. Therefore, the hurdle rate must be set higher than the interest rate to ensure that the project can generate enough returns to cover the borrowed funds and earn a profit.
Learning Objectives
- Understand the necessity of a hurdle rate surpassing the interest rate for projects financed through borrowed funds.