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.
VIDEO

IRR Rule
A measure for evaluating whether to proceed with a project or ... 
Internal Rate Of Return  IRR
The discount rate often used in capital budgeting that makes ... 
Discounted Cash Flow  DCF
A valuation method used to estimate the attractiveness of an ... 
Required Rate Of Return  RRR
The minimum annual percentage earned by an investment that will ... 
Capital Budgeting
The process in which a business determines whether projects such ... 
Rate Of Return
The gain or loss on an investment over a specified period, expressed ...

What is the relationship between the hurdle rate (MARR) and the Internal Rate of ...
In capital budgeting, projects are often evaluated by comparing the internal rate of return, or IRR, on a project to the ... Read Full Answer >> 
Does 'hurdle rate' mean different things in different industries?
The hurdle rate is defined as the minimum rate of return required on a project to cover costs and stay profitable. In different ... Read Full Answer >> 
How far above the hurdle rate makes for a good investment?
The general rule for investment when using a hurdle rate and internal rates of return is that when any internal rate of return ... Read Full Answer >> 
What's the difference between the hurdle rate and the high water mark?
Hurdle rate and high water mark are two types of benchmarks that hedge funds can set as requirements for collecting incentive ... Read Full Answer >> 
What is the difference between stated annual return and effective annual return?
Essentially, the effective annual return accounts for intrayear compounding, and the stated annual return does not. The ... Read Full Answer >> 
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 ... Read Full Answer >> 
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 ... Read Full Answer >> 
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 ... Read Full Answer >>

Investing
What's a Hurdle Rate?
Hurdle rate has two meanings. In the business world, a business typically makes a decision on a capital project based on the net present value approach. To determine the net present value, the ... 
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. 
Fundamental Analysis
Internal Rate Of Return: An Inside Look
Use this method to choose which project or investment is right for you. 
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. 
Investing
Making Sense Of Market Anomalies
Stocks sometimes thwart the efficient market theory by showing some very unusual patterns. 
Economics
How to Do a CostBenefit Analysis
The benefits of a given situation or businessrelated action are summed and then the costs associated with taking that action are subtracted. 
Mutual Funds & ETFs
Top Skills Hedge Funds Look For In Job Candidates
Lucrative salary, high perks, and best quantitative brains at work. What are the top skills a candidate needs to get a job at a hedge fund? 
Mutual Funds & ETFs
Why Hedge Fund Managers Make Good Advisory Clients
Superbusy hedge fund managers should be viewed as an opportunity for sophisticated financial advisors who can step in and offer their services. 
Professionals
A Look at How the UltraWealthy Invest
Ultrawealthy investors are cautious this year as they approach the markets. Many target mutual funds and stocks, but most also diversify their portfolios. 
Professionals
With Rates Low, Where Can Advisors Find Yield?
There are many different options — both conventional and unconventional — available for financial advisors seeking yield and alpha for their clients.