Hurdle rate
Encyclopedia of Business Terms and Methods, ISBN 978-1-929500-10-9. Copyright © 2011. Marty J.Schmidt.
An organization's Hurdle rate is the minimum expected return a company will consider in accepting investment opportunities or action proposals.
A company’s hurdle rate is often set equal to the the discount rate used in discounted cash flow analysis of proposed investments or actions. However, the term is also used to refer to the minimum internal rate of return (IRR) or simple return on investment (ROI) a proposal must must promise in order to be approved for funding and implementation. Proposals that do not exceed the hurdle rate receive no further consideration. In any case, when hurdle rates are discussed, it is always best to ensure that all parties have the same definition in mind.
Common practice is to set the hurdle rate for proposed actions or investments equal to the organization's cost of capital or weighted average cost of capital (WACC). Financial officers will generally consider a proposed investment a net gain if the promised internal rate of return (IRR), for instance, exceeds the company's cost of capital.
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