Why does Target use different hurdle rates for the store and the credit cards (9% and 4%, respectively) ?

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Business

Yosef Hurley

23 October, 11:59

Why does Target use different hurdle rates for the store and the credit cards (9% and 4%, respectively) ?

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Lillie Conway · Answer 1

Target use different hurdle rates for the store and the credit cards (9% and 4%, respectively) because the need for different hurdle rates simply shows the variation in the risk of individual projects and differences in the risk of corporate divisions.

The idea is that the higher the risk of the project, the higher the hurdle rate should be. For instance, Target makes use of different hurdle rates to determine the net present value of future cashflows accounts not only the time value of money but also the risk of future cash flows. As a result, the firm assigns discount rates of 9% for the store sales and 4% for the credit cards sales to represent the different costs of capital for funding store operations versus funding credit card receivables.