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1) How does Teletech currently compute its hurdle rate and how does it evaluate risky projects? What is wrong with this method?
Teletech currently computes its hurdle rate based on a moving average of the firm’s estimated historical cost of capital over the previous ten years, and applies this rate as a minimum return-on-investment criterion for both operating divisions. The company evaluates risky projects by discounting cash inflows and outflows at the hurdle rate with high risk projects requiring an NPV ratio of 1.5, compared to 1.2 for moderate risk projects and 1.0 for very low risk projects.
The problem with the weighted-average method used by Teletech is that it is backward looking as opposed to forward looking. Companies should base their hurdle rates on...
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