Definition of Hurdle rate:
Hurdle rates are very important in the business world, especially when it comes to future endeavors and projects. Companies determine whether they will take on capital projects based on the level of risk associated with it. If an expected rate of return is above the hurdle rate, the investment is considered sound. If the rate of return falls below the hurdle rate, the investor may choose not to move forward. A hurdle rate is also referred to as a break-even yield.
A hurdle rate is the minimum rate of return on a project or investment required by a manager or investor. It allows companies to make important decisions on whether or not to pursue a specific project. The hurdle rate describes the appropriate compensation for the level of risk present—riskier projects generally have higher hurdle rates than those with less risk. In order to determine the rate, the following are some of the areas that must be taken into consideration: associated risks, cost of capital, and the returns of other possible investments or projects.
Minimum return on investment necessary to cover all costs associated with a project. If the expected rate of return is below the hurdle rate, the project is abandoned or is modified to increase the return. It must be equal to the incremental cost of capital and is also called break-even yield.
How to use Hurdle rate in a sentence?
- A hurdle rate is the minimum rate of return required on a project or investment.
- The hurdle rate was determined so we had clear goals and targets to reach in order to turn a profit.
- Investors use a hurdle rate in a discounted cash flow analysis to arrive at the net present value of an investment to deem its worth.
- Companies often use their weighted average cost of capital (WACC) as the hurdle rate.
- Riskier projects generally have a higher hurdle rate, while those with lower rates come with lower risk.
- We may not be able to continue with our home remodeling project because we have failed to reach the hurdle rate ; so, we are spending more than the remodel is worth.
- Hurdle rates give companies insight into whether they should pursue a specific project.
- The hurdle rate was something to pay attention to because it dealt with money and costs and the well being of our company.
Meaning of Hurdle rate & Hurdle rate Definition