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Determination and use of a hurdle rate in the capital budgeting process : evidence from listed Australian companies
journal contributionposted on 06.12.2017, 00:00 authored by Baliira KalyebaraBaliira Kalyebara, Abdullahi AhmedAbdullahi Ahmed
This paper reports the results of a questionnaire survey about the investment appraisal practices of the top 500 companies listed on the Australian Stock Exchange (ASX) and the internal and external factors which impact on the managers’ decisions. For the companies which responded (41%), the results show that the majority of respondents predominately use the discounted cash flow (DCF) techniques. Our study shows that the weighted average cost of capital (WACC) is the most popular method of determining the hurdle rate for Australian firms, and more spefically 71% of respondents use a hurdle rate based on costs of capital. We observe that no one technique is used on its own and that all the respondents indicated they use more than one technique to make investment appraisal decisions. There is evidence to show that the use of the non-DCF techniques such as payback period in the preliminary stages is a common practice because it is easy to compute and understand. More often than not, non-DCF techniques are complemented by DCF techniques such as NPV and IRR as the primary techniques.