Developing a discount rate, evaluating risk The local homeless shelter
received a large donation from a wealthy benefactor and asked you to review its
decision–making process for the proposed investment choice. The shelter’s financial
advisor suggested using the internal rate of return (IRR) to evaluate three different
projects:
REQUIRED:
• A hotel that offers rooms based on the renter’s ability to pay
• An apartment complex for elderly who receive rent subsidization from a
federal agency
• A small cardboard box manufacturing company that will serve as a job training
facility for homeless clients
• A. In your own words, describe the advantages and disadvantages of IRR
for this decision.
projects. Is it a good idea for an organization to use the same hurdle rate for
most projects? Why or why not?
C. List information that might help you develop a hurdle rate for each
project.
D. Which alternative do you believe is most financially risky for the
homeless shelter? Explain your thinking.
