Real World†10.7 gives examples of the rates of return that are targeted by a number of well-known businesses.

It goes on to look at average returns that have been earned by UK businesses over past years. It is clear that most of the businesses that are mentioned have target returns that are well in excess of those that have actually been earned.

Why might these businesses have such high targets? What might be the consequences of such high targets?

Data from Real world 10.7

IRRs for investment projects can vary considerably. Here are a few examples of the expected or target returns from investment projects of large businesses.

• Merlin Entertainments plc, the entertainments business (cinemas, Legoland, Alton Towers) targets an IRR of 14 per cent for new facilities.
• Next plc, the fashion retailer, requires an annual IRR of 30 per cent when appraising online advertising campaigns.
• Rentokil Initial plc, the business services provider, has a required IRR of between 13 and 20 per cent for any investments that it may be considering.
• Draper Esprit plc, a venture capital provider, seeks an IRR of 20 per cent on its investments.
• Goals Soccer Centres plc used an IRR of 20 per cent when assessing its investment in three soccer clubs in Los Angeles.