Hurdle rate.
In plain English
A hurdle rate is the lowest acceptable rate of return on a proposed investment. Companies usually set it at or above their weighted cost of capital, then add a margin for projects that are riskier than the business as a whole. A project whose expected return sits below the hurdle rate is normally rejected even if it would still make money, because the same capital could be used elsewhere. In private funds the term also describes the return limited partners must receive before the manager takes a performance fee. In both uses it is a threshold, not a forecast.
01Why it matters
It is the mechanism that turns opportunity cost into a decision rule, because capital spent on a low-return project is capital not available for a better one.
02The math, step by step
A company sets a 12 percent hurdle rate. A proposed expansion is expected to return 9 percent and a second project 15 percent. The 9 percent project fails the test even though it is profitable, because it does not clear the bar.
Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.
03What this is NOT
Internal rate of return is the return a project is expected to produce. The hurdle rate is the minimum the decision-maker will accept. The comparison between them is the decision, and confusing the two collapses the test into a single number.
04Receipts
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Plain-English answers from our glossary. Receipts included. Never advice.
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