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. Capital Budgeting

    The process in which a business determines whether projects such ...
  3. Discounted Cash Flow - DCF

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

    The discount rate often used in capital budgeting that makes ...
  5. Required Rate Of Return - RRR

    The minimum annual percentage earned by an investment that will ...
  6. Rate Of Return

    The gain or loss on an investment over a specified period, expressed ...
Related Articles
  1. What is the difference between stated ...
    Investing

    What is the difference between stated ...

  2. How To Calculate Required Rate Of Return
    Forex Education

    How To Calculate Required Rate Of Return

  3. Internal Rate Of Return: An Inside Look
    Fundamental Analysis

    Internal Rate Of Return: An Inside Look

  4. Use ROA To Gauge A Company's Profits
    Budgeting

    Use ROA To Gauge A Company's Profits

Hot Definitions
  1. Hyperinflation

    Extremely rapid or out of control inflation. There is no precise numerical definition to hyperinflation. Hyperinflation is ...
  2. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
  3. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  4. Leading Indicator

    A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators ...
  5. Wage-Price Spiral

    A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. ...
  6. Accelerated Depreciation

    Any method of depreciation used for accounting or income tax purposes that allows greater deductions in the earlier years ...
Trading Center