Hurdle Rate

AAA

DEFINITION of 'Hurdle Rate'

The minimum rate of return on a project or investment required by a manager or investor. In order to compensate for risk, the riskier the project, the higher the hurdle rate.

In the hedge fund world, hurdle rate refers to the rate of return that the fund manager must beat before collecting incentive fees.

INVESTOPEDIA EXPLAINS 'Hurdle Rate'

In capital budgeting, projects are evaluated either by discounting future cash flows to the present by the hurdle rate, so as to ascertain the net present value of the project, or by computing the internal rate of return (IRR) on the project and comparing this to the hurdle rate. If the IRR exceeds the hurdle rate, the project would most likely go ahead.


For example, a company with a hurdle rate of 10% for acceptable projects, would most likely accept a project if it has an internal rate of return of 14% and does not have a significantly higher degree of risk. Alternately, discounting the future cash flows of this project by the hurdle rate of 10% would lead to a large and positive net present value, which would also lead to the project's acceptance.

RELATED TERMS
  1. IRR Rule

    A measure for evaluating whether to proceed with a project or ...
  2. Internal Rate Of Return - IRR

    The discount rate often used in capital budgeting that makes ...
  3. Discounted Cash Flow - DCF

    A valuation method used to estimate the attractiveness of an ...
  4. Rate Of Return

    The gain or loss on an investment over a specified period, expressed ...
  5. Required Rate Of Return - RRR

    The minimum annual percentage earned by an investment that will ...
  6. Capital Budgeting

    The process in which a business determines whether projects such ...
RELATED FAQS
  1. What is the difference between stated annual return and effective annual return?

    Essentially, the effective annual return accounts for intra-year compounding, and the stated annual return does not. The ...
  2. What's the difference between net present value and internal rate of return? How ...

    Both of these measurements are primarily used in capital budgeting, the process by which companies determine whether a new ...
  3. How does the required rate of return affect the price of a stock, in terms of the ...

    First, a quick review: the required rate of return is defined as the return, expressed as a percentage, that an investor ...
  4. Which is a better measure for capital budgeting, IRR or NPV?

    In capital budgeting, there are a number of different approaches that can be used to evaluate any given project, and each ...
Related Articles
  1. Forex Education

    How To Calculate Required Rate Of Return

    The required rate of return is used by investors and corporations to evaluate investments. Find out how to calculate it.
  2. Fundamental Analysis

    Internal Rate Of Return: An Inside Look

    Use this method to choose which project or investment is right for you.
  3. Budgeting

    Use ROA To Gauge A Company's Profits

    Do you rely too heavily on ROE? Consider using return on assets for a more complete picture.
  4. Investing

    Making Sense Of Market Anomalies

    Stocks sometimes thwart the efficient market theory by showing some very unusual patterns.
  5. Investing

    Hedged ETFs That Help You Cushion Currency Impact

    If you’re an investor holding non-U.S. assets, the returns on your investments will be affected when you translate your investment from its local currency
  6. Investing

    Additional Paid-In Capital

    Additional paid-in capital is an account in the equity section of a balance sheet. It represents the additional amount paid for the company’s shares over the par value of the shares. Additional ...
  7. Mutual Funds & ETFs

    Tired Of Mutual Funds? Try This Alternative

    Mirrored investments services are a beneficial alternative to traditional mutual funds. Discover how they work and how they can be used to your advantage.
  8. Fundamental Analysis

    Capital Budgeting

    Capital budgeting is a planning process used by companies to evaluate which large projects to invest in, and how to finance them. It is sometimes called “investment appraisal.”
  9. Mutual Funds & ETFs

    Position Your ETF Portfolio For Success In 2015

    2015 may well usher in a new era in the markets where things like risk management, trend following, and asset allocation are key to a successful outcome.
  10. Investing

    Return On Capital Employed - ROCE

    Return on Capital Employed (ROCE) is a financial ratio that measures company's ability to earn a return on all of the capital it employs.

You May Also Like

Hot Definitions
  1. Sunk Cost

    A cost that has already been incurred and thus cannot be recovered. A sunk cost differs from other, future costs that a business ...
  2. Technical Skills

    1. The knowledge and abilities needed to accomplish mathematical, engineering, scientific or computer-related duties, as ...
  3. Prepaid Expense

    A type of asset that arises on a balance sheet as a result of business making payments for goods and services to be received ...
  4. Gordon Growth Model

    A model for determining the intrinsic value of a stock, based on a future series of dividends that grow at a constant rate. ...
  5. Cost Accounting

    A type of accounting process that aims to capture a company's costs of production by assessing the input costs of each step ...
  6. Law Of Supply

    A microeconomic law stating that, all other factors being equal, as the price of a good or service increases, the quantity ...
Trading Center