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I work for a european company which invests mostly in the euro zone but also in the UK. I'm in charge with calculating the hurdle rate targeted for these investments.

The internal guidelines are for euro labeled projects. But I'm trying to figure out the hurdle rate required for GBP labelled projects.

Let's say I have a target return of 10% in the Euro zone. The current exchange rate EUR:GBP 1:0.89. the target IRR for UK prjects becomes 8.9%

Is it the right method ?

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It depends. Is the project being carried in the original place or moving to the UK?

  1. If the project keeps being in the original place (i.e. euro zone) and you want the IRR in GBP, then you need somehow to factor in the currency fluctuation for the cash-flows. That can be done either through adjusting the cash-flows with an expected exchange rate or by adding a risk=premium to the discount rate.
  2. If the project is carried out in the UK, then you need to adjust for the difference in risk-premium for the project given that it is carried out in a different place.

Here you have a good start for country risk premiums: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ctryprem.html

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Point of clarification : are you asking about required returns in pounds sterling for projects conducted in the UK? If so, you also need to adjust for any difference in risk free interest rates between Euro and UK. You can do this be comparing 5yr UK gilt yields with 5year German govt bond yields , for example. I believe the UK yields are higher, so you would have a required return higher than 10%.

The method you described in the question (using the fx rate) is not right!

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