What is a 'Hurdle Rate'
A hurdle rate is the minimum rate of return on a project or investment required by a manager or investor. The hurdle rate denotes appropriate compensation for the level of risk present; riskier projects generally have higher hurdle rates than those that are less risky.
In hedge funds, the hurdle rate refers to the rate of return that the fund manager must beat before collecting incentive fees.
BREAKING DOWN 'Hurdle Rate'
A hurdle rate functions as a parameter for comparison when determining the worthiness of a particular investment compared to the associated risk. If an expected rate of return is above the hurdle rate, the investment is sound. If the rate of return falls below the hurdle rate, the investor may choose not to move forward. Some may also call a hurdle rate a breakeven yield.
In capital budgeting, projects are evaluated either by discounting future cash flows to the present by the hurdle rate, to determine the net present value of the project or by computing the internal rate of return on the project and comparing this to the hurdle rate. If the IRR exceeds the hurdle rate, the project would most likely proceed.
Example of How to Use a Hurdle Rate
During the analysis of a potential investment, a risk premium is assigned to denote the anticipated amount of risk involved with the project in question. Risk premiums may be positive or negative with negative rates helping offset other factors that may make an investment look less appealing if the involved risk was not so low.
Using a hurdle rate to determine an investment's potential helps eliminate any bias created by preference toward a project. By assigning an appropriate risk factor, one can use the hurdle rate to demonstrate whether the project has financial merit regardless of any intrinsic value that may be assigned.
For example, a company with a hurdle rate of 10 percent for acceptable projects would most likely accept a project if it has an internal rate of return of 14 percent and does not have a significantly higher risk. Alternately, discounting the future cash flows of this project by the hurdle rate of 10 percent would lead to a large and positive net present value, which would also lead to the project's acceptance.
In situations where a legal requirement exists regarding the completion of the project, the hurdle rate is a nonfactor. Regardless of the risks or anticipated returns, mandated projects move forward to assure compliance with any applicable laws or regulations.

Performance Fee
A performance fee is a payment made to an investment manager ... 
Profitability Index
The profitability index is a technique used to measure a proposed ... 
Initial Cash Flow
Initial cash flow is the amount of money paid out or received ... 
Capital Project
A capital project is a longterm investment project designed ... 
Unconventional Cash Flow
An unconventional cash flow is a series of inward and outward ... 
Net Present Value Rule
The net present value rule (NPV) states that an investment should ...

Retirement
Retirement Planning: What’s Your Hurdle Rate?
Avoid the biggest retirement mistakes by paying attention to your hurdle rate. 
Financial Advisor
A Guide on the RiskAdjusted Discount Rate
When a project or investment faces higher amounts of risk or uncertainty, it may be appropriate to utilize the riskadjusted discount rate. 
Small Business
Capital Budgeting: Which is Better, IRR or NPV?
Using internal rate of return and net present value for capital budgeting evaluations often end in the same result. But there are times when using NPV to discount cash flows makes more sense. 
Investing
An Introduction To Capital Budgeting
We look at three widely used valuation methods and figure out how companies justify spending. 
Investing
The Risks Associated with Common Investments
Investing inherently involves some risk. Here are some of the different types of investment risks. 
Investing
How interest rates affect property values
Interest rates have profound impact on the value of incomeproducing real estate property. Find out how the rise and fall of interest rate affects property value. 
Investing
What Is A Corporate Credit Rating?
Is the bond you're buying investment grade, or just junk? Find out how to check the score. 
Investing
Internal rate of return: An inside look
The internal rate of return can be used to measure an compare capital projects, stock buyback programs, and investments to determine which will yield the most favorable return. 
Financial Advisor
How Federal Reserve Activity Impacts Investment Portfolios
The Federal Reserve's monetary policies impact investments in a number of ways. 
Investing
Internal Rate of Return Formula for Excel
The internal rate of return, or IRR, is a popular metric businesses use to measure a project’s return on investment.

How do hurdle rate MARR and internal rate of return IRR relate?
In capital budgeting, projects are evaluated by comparing the internal rate of return (IRR) to the hurdle rate, also known ... Read Answer >> 
How do you use discounted cash flow to calculate a capital budget?
Learn how discounted cash flows are used in creating capital budgets as a part of the net present value and internal rate ... Read Answer >> 
What is the difference between the cost of capital and the discount rate?
Learn about the differences between the cost of capital and the discount rate as they relate to estimating a required return ... Read Answer >>