## Arbitrary benchmark cutoff rate

8 Jan 2009 ignored
• Uses an arbitrary benchmark cutoff rate
• Based on accounting net income and  money ignored – Uses an arbitrary benchmark cutoff rate – Based on accounting net income and book values, not cash flows and market values Internal Rate  The TAMP Order has not provided any reason for using a cut off rate of 24 uses a very high cut off rate, which seems to have been arrived at arbitrarily. (c). PNP is the benchmark productivity that must be achieved in the next tariff period.

2- Requires an arbitrary cutoff point: when deciding on the cutoff period, there is no objective basis for choosing a particular number. 3- Ignores cash flows beyond the cutoff date: the cash flows that occur after the cutoff period are totally ignored. So the payback period may lead to the rejection of profitable long-term investment. Alternatively, consumers can lock in a higher rate with a one-, three- or five-year certificate of deposit (top yielding rates average 2.3%, 2.5% and 2.75%, respectively) although that money isn't A cutoff point is a subjective point at which an investor decides whether or not a security is worth buying. Cutoff points vary widely among investors and can be dependent upon the investor's risk A predetermined arbitrary cut-off may be used in place of the COST OF CAPITAL as the DISCOUNT RATE. Different cut-off rates may be employed for projects with different degrees of riskiness. See DISCOUNTED CASH FLOW. Computing NPV for the Project Using the formula: NPV = -165,000/(1.12)0 + 63,120/(1.12)1 + 70,800/(1.12)2 + 91,080/(1.12)3 = 12,627.41 Net Present Value Sum of the PVs of all cash flows. << CALCULATOR << EXCEL Rationale for the NPV Method NPV = PV inflows – Cost NPV=0 → Project’s inflows are “exactly sufficient to repay the invested capital and provide the required rate of return” NPV = net gain in shareholder wealth Rule: Accept project if NPV > 0 NPV Method Meets all desirable

## the minimum rate of return used in INVESTMENT APPRAISAL for the purpose of deciding if an investment project is to go ahead. A predetermined arbitrary cut-off

time value of money is ignored. – Uses an arbitrary benchmark cutoff rate. – Based on accounting net income and book values, not cash flows and market values. o Cons – ignores time value of money; uses arbitrary benchmark cutoff rate; projects; cutoff period arbitrary; does not lead to value-maximizing decisions. 8 Jan 2009 ignored

• Uses an arbitrary benchmark cutoff rate
• Based on accounting net income and  money ignored – Uses an arbitrary benchmark cutoff rate – Based on accounting net income and book values, not cash flows and market values Internal Rate  The TAMP Order has not provided any reason for using a cut off rate of 24 uses a very high cut off rate, which seems to have been arrived at arbitrarily. (c). PNP is the benchmark productivity that must be achieved in the next tariff period.

### Not a true rate of return; time value of money is ignored. Uses an arbitrary benchmark cutoff rate. Based on accounting net income and book values, not cash flows and market values.

After determine the AAR, compare with target cutoff rate. For example, if AAR determined is 20%, and given cutoff rate is 25%, then this project should be rejected. Because AAR is lower than cutoff rate so this project will not make sufficient net income to cover initial cost. – Uses an arbitrary benchmark cutoff rate – Based on accounting net income and book values, not cash flows and market values Internal Rate of Return • This is the most important alternative to NPV • It is often used in practice and is intuitively appealing • It is based entirely on the estimated cash flows and is independent of interest rates In addition to the cut on its benchmark overnight borrowing rate, the Fed also announced a half percentage point cut on the interest it pays on excess bank reserves. The IOER is used as a – Uses an arbitrary benchmark cutoff rate – Based on accounting net income and book values, not cash flows and market values Internal Rate of Return • This is the most important alternative to NPV • It is often used in practice and is intuitively appealing • It is based entirely on the estimated cash flows and is independent of interest rates

### After determine the AAR, compare with target cutoff rate. For example, if AAR determined is 20%, and given cutoff rate is 25%, then this project should be rejected. Because AAR is lower than cutoff rate so this project will not make sufficient net income to cover initial cost.

4 Mar 2020 A hurdle rate is the minimum rate of return on a project or investment required by a manager or investor. Hurdle rates allow companies to make  time value of money is ignored. – Uses an arbitrary benchmark cutoff rate. – Based on accounting net income and book values, not cash flows and market values. o Cons – ignores time value of money; uses arbitrary benchmark cutoff rate; projects; cutoff period arbitrary; does not lead to value-maximizing decisions. 8 Jan 2009 ignored

• Uses an arbitrary benchmark cutoff rate
• Based on accounting net income and

## 2- Requires an arbitrary cutoff point: when deciding on the cutoff period, there is no objective basis for choosing a particular number. 3- Ignores cash flows beyond the cutoff date: the cash flows that occur after the cutoff period are totally ignored. So the payback period may lead to the rejection of profitable long-term investment.

– Uses an arbitrary benchmark cutoff rate – Based on accounting net income and book values, not cash flows and market values Internal Rate of Return • This is the most important alternative to NPV • It is often used in practice and is intuitively appealing • It is based entirely on the estimated cash flows and is independent of interest rates 2- Requires an arbitrary cutoff point: when deciding on the cutoff period, there is no objective basis for choosing a particular number. 3- Ignores cash flows beyond the cutoff date: the cash flows that occur after the cutoff period are totally ignored. So the payback period may lead to the rejection of profitable long-term investment. Need to have a target cutoff rate Decision Rule Accept the project if the AAR from FINA 2010 at CUHK A predetermined arbitrary cut-off may be used in place of the COST OF CAPITAL as the DISCOUNT RATE. Different cut-off rates may be employed for projects with different degrees of riskiness. See DISCOUNTED CASH FLOW. Free benchmarking software. Compare results with other users and see which parts you can upgrade together with the expected performance improvements.

A cutoff point is a subjective point at which an investor decides whether or not a security is worth buying. Cutoff points vary widely among investors and can be dependent upon the investor's risk A predetermined arbitrary cut-off may be used in place of the COST OF CAPITAL as the DISCOUNT RATE. Different cut-off rates may be employed for projects with different degrees of riskiness. See DISCOUNTED CASH FLOW. Computing NPV for the Project Using the formula: NPV = -165,000/(1.12)0 + 63,120/(1.12)1 + 70,800/(1.12)2 + 91,080/(1.12)3 = 12,627.41 Net Present Value Sum of the PVs of all cash flows. << CALCULATOR << EXCEL Rationale for the NPV Method NPV = PV inflows – Cost NPV=0 → Project’s inflows are “exactly sufficient to repay the invested capital and provide the required rate of return” NPV = net gain in shareholder wealth Rule: Accept project if NPV > 0 NPV Method Meets all desirable After determine the AAR, compare with target cutoff rate. For example, if AAR determined is 20%, and given cutoff rate is 25%, then this project should be rejected. Because AAR is lower than cutoff rate so this project will not make sufficient net income to cover initial cost. – Uses an arbitrary benchmark cutoff rate – Based on accounting net income and book values, not cash flows and market values Internal Rate of Return • This is the most important alternative to NPV • It is often used in practice and is intuitively appealing • It is based entirely on the estimated cash flows and is independent of interest rates