The general rule for investment when using a hurdle rate and internal rates of return is that when any internal rate of return is higher than the hurdle rate, it is acceptable to make the investment. There is no set rule regarding the level of the value above the hurdle rate that indicates a good investment. The only rule is that the internal rate of return must fall above the hurdle. The hurdle rate is the minimum rate of return from an investment. If an internal rate of return is 20% and the hurdle rate is 10%, management is likely to consider the investment or project worth pursuing.

The hurdle rate is one method of evaluating the decision to make an investment. It is not always the best method and may give a false impression of how well the investment might benefit the company. Higher return rates do not always correspond to more cash. An investment that uses less money can yield a greater return rate than an investment that requires more cash. An investment with larger sums of money can yield greater cash returns even though the hurdle rate does not look appealing. Internal rates of return are not useful if interim cash is the result of the investment.

Finally, internal rates of return do not allow comparing projects that take different durations to complete, and they do not take into account capital costs. For these reasons, financial experts caution against using the internal rate of return on its own when considering a project or investment.

  1. Does 'hurdle rate' mean different things in different industries?

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  2. How hurdle rate and internal rate of return relate

    Find out how companies and managers use hurdle rate (MARR) and internal rate of return (IRR), to evaluate projects and investments. Read Answer >>
  3. What's the difference between the hurdle rate and the high water mark?

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  4. How can I calculate the hurdle rate in Excel?

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  5. How do you use internal rate of return to calculate a capital budget?

    Learn about how the internal rate of return is used in the creation of a capital budget along with net present value and ... Read Answer >>
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