The Role of Hurdle Rate in Divisional Performance Evaluation and New Product Development with Alternative Opportunities

Abstract

This paper investigates the role of hurdle rate in new product development in the situation where the divisional manager is delegated to manage such projects.

I show hurdle rate basically helps control the manager's behaviors regarding risk taking decision and labor intensive expenditures.

I analyze several modified cases and show that there exist cases where such a role of hurdle rate does not function due to the existence of withdrawal opportunities from new product development projects.

Keywords: hurdle rate, new product development, labor intensive expenditure, performance evaluation, innovation

JEL Classification: G31, M41, O31