What is Hurdle rate?
A hurdle rate is the minimum rate of return that an investment must achieve in order for it to be considered viable or worthwhile. It is often used by companies to evaluate potential capital investments and is typically set at a level that is higher than the company's cost of capital.
The hurdle rate is the lowest acceptable rate of return on investment for investors. taking into consideration the risks involved The greater the risk, the higher the hurdle rate. It is also known as the investment target rate.
Before investing in any project, business owners typically determine the project’s hurdle rate. Return expectations are usually higher when the project’s risk is higher. The expected cash flow is discounted at this rate to determine the project’s worth.
The hurdle rate allows investors to select projects without being influenced by the expected return. Investors can quickly determine whether a project is worthwhile to invest in. The hurdle rate uses a stricter method to determine the value of an investment than the weighted average cost of capital.
Did you know?
You can use hurdle rates to calculate the efficiency of future investments and cash flow? Do you intend to invest in a new project? We can assist you in calculating the hurdle rate.
You can even get free consulting. Try it out right now.