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What is hurdle rate?

Author:
Harold Averkamp, CPA, MBA

Definition of Hurdle Rate

In capital budgeting, the term hurdle rate is the minimum rate that a company wants to earn when investing in a project. Therefore, the hurdle rate is also referred to as the company’s required rate of return or target rate. For a company to further consider a project, its internal rate of return must equal or exceed the hurdle rate.

The hurdle rate is also used to discount a project’s future cash flows to its net present value.

Example of Hurdle Rate

The absolute minimum hurdle rate should be the company’s cost of capital (a blend of the cost of debt and the cost of equity). However, the hurdle rate is usually larger than the cost of capital when the company has many investment opportunities and for projects that have a higher level of risk.

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About the Author

Harold Averkamp

For the past 52 years, Harold Averkamp (CPA, MBA) has
worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.

Learn More About Harold

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