Hurdle rates. Assume that Hershey Foods has a policy that cost savings projects must earn a 16 percent hurdle rate and that new products must earn a 25 percent hurdle rate. The hurdle rate is a result of historical analysis and the perceived risk associated with both project types.
I have funding requests for two projects, project A, which is a cost savings project with a 16.5 percent rate of return and project B, which is a higher-returning, new product and has a 22 percent rate of return. If I can fund only one of them, which project should I recommend and why?