Companies raise money through Shares and Loans to run their businesses. These providers of capital require a return rate from the company for the use of funds. Therefore when considering monies spent for investment, companies must ensure that the rate generated from the investment is higher than the aggregate combined interest cost of loans and the dividend requirements of shareholders. This aggregate rate is the 'Minimum Return Rate'
eg - Minimum Return Rate 9%
IRR of project 12%
Investment return exceeds Minimum return (pa%) therefore project acceptance likely. Typical minimum return (pa%) rates are between 8% and 15% depending upon industry and risk profile.
Companies borrow money to fund their operations. This has an annual cost in terms of interest (loans) and dividends (shares). An average minimum requirement is calculated by looking at the two forms of funds (typically 8%-15%). Along comes a proposal that makes great business sense. Your requirement now is that the annual rate of profit generated is HIGHER than the rate for the funds that you raise to run your own company. This minimum % requirement is the 'Minimum Return Rate' that must be exceeded before deciding whether to complete the investment or not.
P.S. - These are sophisticated calculations that are made ridiculously easy in Shark software.
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