How do you calculate hurdle rate?

Here is the formula: Cost of capital + risk premium = hurdle rate. For example, if an investor’s cost of capital is 5%, and the risk premium for a specific investment is 3%, the hurdle rate would be 5% plus 3% or 8%. In this case, the investment under consideration would have to offer a return of 8% or better in order to clear the hurdle rate.

What is a hurdle rate?

A hurdle rate is the minimum rate of return required on a project or investment. Hurdle rates give companies clarity about whether they should pursue a specific project. Generally, the higher the risk, the higher the hurdle rate. Investors use a hurdle rate in a discounted cash flow analysis to determine an investment's value and assess its worth.

How do you determine a competitive hurdle rate?

The return that may be obtained from different investments with comparable risk should be represented by the opportunity cost of capital, which is what the hurdle rate should take into account. Establishing a competitive hurdle rate involves weighing the investment's possible return against other accessible options. 4. Time Horizon