Hurdle rate
Hurdle rate, also known as the minimum acceptable rate of return (MARR), is the minimum rate of return that an investor expects to achieve when investing in a project or making an investment decision. It is used by companies to evaluate the feasibility of a project and to compare different investment opportunities.
The hurdle rate is usually set based on the company’s cost of capital or the risk-free rate of return. If a project or investment does not meet or exceed the hurdle rate, it is considered not worth pursuing.
For example, if a company’s cost of capital is 10%, the hurdle rate for a new project might be set at 12% to account for the project’s risk. If the project is expected to generate a return of only 11%, it would not meet the hurdle rate and may be rejected.
Another example is in the context of private equity investments. Private equity firms typically have a hurdle rate that they need to achieve in order to generate a return for their investors. If a potential investment does not meet or exceed this hurdle rate, it may not be pursued.
In conclusion, the hurdle rate is an important tool used by companies and investors to evaluate the potential return of an investment and to make informed decisions about where to allocate their capital.
Related link: Wikipedia – Hurdle rate