Nominal Hurdle Rate Vs Real Hurdle Rate

sania.saeeed · 07-20-2010, 07:34 PM

Plz someone guide me the real difference between the two with an easy to understand example [?]

imdad1 · 07-20-2010, 08:07 PM

its simple!

Nomial rate is rate adjusted for inflation effect!!

its formula is (1+nomial rate)=(1+Real rate)(1+inflation rate)

now for understanding lets assume u give me 10 million to me today at interest premium of 20%(without inflation return) than if i return u 12 million after one year what will be your reaction in the following three enviroments

1) a country with no inflation

2) a country with inflation of 20%

3) a country with inflation of 50%

off course in 3rd case u would not be happy as the return given by the borrower does not even cover the inflation impact!! thus in reality u are making a loss..

and thus in order to adjust the return for inflation effect nomial rate is computed...so that the investor is given an adequate return...

the second implication of nomial return and real return come when we are doing financial management as when we are making decision about investing in the project of not.. so we plot cash flows

if we are plotting nomial cash flows they would be discounted using nomial rate!
and if we are using real cash flows they would be discounted using real rate

in order to compute the Net Present value (NPV)

This rule is called LIKE for LIKE

i hope the above discussion would be beneficial..!! )
thanks and regards
IMDAD ALI SHAH BUKHARI

<blockquote id="quote">quote<hr height="1" noshade id="quote">Originally posted by sania.saeeed
 Plz someone guide me the real difference between the two with an easy to understand example [?]
<hr height="1" noshade id="quote"></blockquote id="quote">

ciapk · 07-20-2010, 09:22 PM

O level ki accounting krtay krtay direct Strategic Financial Management main kahan ja ghusin? -)

Hurdle Rate.

Hurdle rate is the minimum rate of return on a project a manager or company is willing to accept before starting a project, given its risk and the opportunity cost of forgoing other projects. Other name are, Minimum Acceptable Rate of Return MARR, Minimum Attractive Rate of Return, Required Rate,

Nominal Hurdle Rate

Nominal rate refers to the rate of interest before adjustment for inflation.

Real Hurdle Rate

The "real rate" is approximately the nominal interest rate minus the inflation rate.

Inflation Rate

Inflation rate is a measure of inflation, the rate of increase of a price index.

So, lets take an example

You have Rupees 1,000 and deposited in to the bank account for a period of one year. your required rate of return (Real Hurdle Rate) is 10% p.a and inflation rate in Pakistan is 15% p.a. what will be the calculation.

Principal Rs 1,000
Real Return @ 10% Rs 100
Total Rs 1,100

Now in this situation you have received your required return as well as your principal but you have not taken the impact of inflation in the country, your purchasing power have been reduced or price level of commodities has been increased by 15& (Inflation Rate).

So, in above situation 10% is real return not a nominal return in order to calculate nominal return we will incorporate impact of inflation first then we will calculate our return e.g

Principal Rs 1,000
Inflation @15% Rs 150
Adjusted Principal Rs 1,150
Real Return @ 10% Rs 115
Total Rs 1,265

So, in order to get Rs 1,265 in future by investing Rs 1,000 your required rate before adjustment of inflation rate should by 26.5% (Nominal Hurdle rate).

Is it okayyyyy?

imdad1 · 07-20-2010, 09:26 PM

@ CIApk yeh tu khalilullah Sheikh ki example hai!! P

ciapk · 07-20-2010, 09:37 PM

No from Maqbool sb, Yay unki book main be hay? may be i kept these figures for the sake of simplicity only -)

imdad1 · 07-20-2010, 10:01 PM

Ahan i see
you qualified?
which entity??
<blockquote id="quote">quote<hr height="1" noshade id="quote">Originally posted by ciapk
 No from Maqbool sb, Yay unki book main be hay? may be i kept these figures for the sake of simplicity only -)
<hr height="1" noshade id="quote"></blockquote id="quote">

ciapk · 07-20-2010, 10:17 PM

No dear, BFD and Tax is still to go since long, One of Co in AGC and in Lahore

imdad1 · 07-20-2010, 10:31 PM

Allah Maaf karay

this time i am expecting Inshallah to pass both..i have 3 with addition of Audit and this was my second attempt.
<blockquote id="quote">quote<hr height="1" noshade id="quote">Originally posted by ciapk
 No dear, BFD and Tax is still to go since long, One of Co in AGC and in Lahore
<hr height="1" noshade id="quote"></blockquote id="quote">

ciapk · 07-20-2010, 10:34 PM

Best of luck dear. -)

sania.saeeed · 07-21-2010, 04:40 PM

Waooooooooooo I am surprised k main samaj gaeeeeeeee. Thank you so much both of you Imdad1 and IB. Main nahin ghosi wo mayri book kay last main chapter hay oos main tha pher main nay net pay search kya samaj main nai aay jab ja kay poocha.

imdad1 · 07-21-2010, 04:45 PM

ahan Fine you are welcome...i love BFD , tax and ifrs questions!!