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.

What is a hurdle rate equation?

The hurdle rate equation acts as a benchmark for comparison between the worthiness of a particular investment and associated risk. In capital budgeting, if the expected rate of return is higher than the hurdle rate, then the investment is considered to be a good one.

What is the difference between hurdle rate and minimum acceptable rate of return?

Let us understand them through the comparison below. The hurdle rate, also known as the minimum acceptable rate of return, is a predetermined benchmark or threshold that a company or investor sets to evaluate the attractiveness of an investment. It represents the minimum return an investment must generate to justify the associated risks and costs.