Final answer:
The investment decision incorporates the hurdle rate which considers risk, return, and liquidity of financial investments. An investor may use a rate like 15% as a benchmark to evaluate whether the tradeoffs are acceptable.
Step-by-step explanation:
The investment decision includes the hurdle rate reflecting the riskiness of an investment as well as the magnitude and timing of cash flows and their side effects. When making an investment decision, financial investors must take into account not only the expected rate of return but also the risk associated with the investment and its liquidity. To do this, an interest rate is chosen to value future payments, which includes the opportunity cost of capital and a risk premium that compensates for taking on an investment that appears riskier than others. For example, if a financial investor decides that a 15% interest rate appropriately reflects the tradeoffs between return and risk for a given investment, then the individual is effectively using this rate as a hurdle that the investment must clear to be considered worthwhile.