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High hurdle rates keeping a lid on capital spending.

Despite a sharp drop in short- and long-term interest rates, 34% of U.S. companies still use hurdle rates of 12% or more to justify capital investments, according to a survey of 612 companies conducted by the Institute of Management Accountants (IMA). Jonathan B. Schiff, consulting director for the IMA and professor of accounting at Fairleigh Dickinson University, says, "By employing inflated hurdle rates, companies may be missing out on business opportunities."

Financial managers use hurdle rates to decide on expansion and modernization plans and investments. Theoretically, a company's hurdle rate should be its cost of capital expressed as a percentage. Therefore, it should respond to changes in the interest-rate structure. However, difficulty in altering a company's financial management software system often delays hurdle rate changes.

The IMA survey was conducted in mid-March 1992, when the prime rate stood at 6.5%, three-month prime commercial paper was yielding 4.25% and 30-year Treasury bonds were yielding 7.9%. At that time, 16% of the companies surveyed used hurdle rates of 5% to 7%, 50% used hurdle rates of 8% to 11% and 34% used hurdle rates of 13% or more.
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Title Annotation:Institute of Management Accountants survey
Publication:Journal of Accountancy
Article Type:Brief Article
Date:Jun 1, 1992
Words:190
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