When an organization must decide whether to proceed with a project, they need to take into account how much they could earn on their money without actually having to put it to risk as well as what the cost of their capital is. For example, if a company could park its money in short term treasury bills at a rate of 4%, (not possible these days) and a risky project they are considering would return 4%, the company is better off investing in a safe and liquid investment such as treasury bills assuming their cost of capital is less than 4%. Sometimes the decision is not that easy.
Class, organizations can set their own standards on the amount of time it takes a project to return their funds, the level of acceptable risk, what IRR is acceptable and so forth. In your opinion, what required rate of return would be a good rate to use in this economic environment? And why? Also, if you know of your company’s standard on this, please share.