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.
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.
Investment dictionary. Academic. 2012.
Look at other dictionaries:
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Hurdle rate — The hurdle rate is the minimum rate of return that must be met for a company to undertake a particular project. The hurdle rate is usually determined by evaluating existing opportunities in operations expansion, rate of return for investments,… … Wikipedia
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hurdle rate — The rate of interest in a capital budgeting study that a proposed project must exceed before it can be regarded worthy of consideration. The hurdle rate is often based on the cost of capital or the weighted average cost of capital, adjusted by a… … Big dictionary of business and management
hurdle rate — Fin a rate of return which a capital investment proposal must achieve if it is to be accepted. Set by reference to the cost of capital, the hurdle rate may be increased above the basic cost of capital to allow for different levels of risk … The ultimate business dictionary
hurdle rate — / hɜ:d(ə)l reɪt/ noun 1. the rate of growth in a portfolio required to repay the final fixed redemption price of zero dividend preference shares 2. a minimum rate of return needed by a bank to fund a loan, the rate below which a loan is not… … Dictionary of banking and finance
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Минимально допустимая рентабельность (HURDLE RATE, CUT-OFF RATE) — Минимально допустимая норма прибыли, которую компании предполагают получить от будущего проекта или инвестиций без учета нефинансовых показателей. Минимально допустимая рентабельность обычно превышает стоимость капитала компании. Называется также … Словарь терминов по управленческому учету