Required Rate of Return

Definition

Required rate of return (RRR) is the minimum return (profit) that a company or an investor will aim to receive considering a certain level of risk of investing that comes along with the type of project/investment.

Example

For example, if a company is expecting to earn 10% annually from Project A, the required rate of return could be 12% for an alternative project that carries higher risk.

Why it matters

Companies use RRR to take crucial decisions on expanding or taking on new projects. RRR is used as a benchmark for minimum acceptable returns depending on the cost and returns from alternative investment opportunities.

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