What is an appropriate investment hurdle rate for commercial space resource development projects?

Abstract

This article sets out to identify an appropriate hurdle rate range for commercial space resource development projects, should such an industry eventuate. There has been little consistency in the use of hurdle rates and discount rates in the evaluation of space resource projects proposed to date. The article uses two approaches to determine an appropriate hurdle rate for the economic evaluation of such projects. Firstly, the article reviews hurdle rate usage in three industries with parallels to a potential space resource industry – the mining industry, the oil & gas industry, and the aerospace industry. The venture capital sector is also considered. The article finds that there is limited direct reference to the hurdle rates used in these industries and therefore uses expected project IRR and corporate Cashflow Return on Investment (CFROI) as proxies to quantify hurdle rates in each industry. Secondly, the article develops a Risk Build Up Method (RBUM) to determine appropriate hurdle rates for hypothetical commercial space resource development projects by quantifying the potential commercial risk to which such projects could be exposed. The RBUM process correlates a commercial risk score quantified on a project by project basis with a hurdle rate risk premium scale to determine an appropriate hurdle rate for such projects. Finally, the article discusses discount rate treatment in the analogue industries, with a view to proposing a consistent approach to the use of discount rates in a potential space resources industry. The article finds that hurdle rates in the range of 25% could be appropriate for potential commercial space resource development projects, depending on the perceived risk of the project, and assuming a suitable legal/regulatory regime is in place. This hurdle rate range and the RBUM process could evolve over time should such an industry eventuate and ultimately mature. The article also proposes that a ‘standard’ industry discount rate of 10% be utilised in order to facilitate the comparison of project to project valuations, based on the discount rate convention for reporting requirements in the US oil & gas industry.