Hurdle Rate

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Definition

The minimum rate of return on a project / investment a company set for project screening. This allow companies to make decision on whether to pursue a specific project.

Usually is a function of the company’s weighted average cost of capital (WACC) and the risk premium.

WACC

This involves the cost of capital (funds). Consider

  • cost of debt (interest on loan)
  • cost of equity (dividends paid to shareholders)

Risk Premium

Management’s prerogative to include risk premium from country and other perceived risks.

A risk premium is assigned to a potential investment to denote the anticipated amount of risk involved. The risk premium may be either positive of negative – negatives rate help offset other factors that lessen the appeal of an investment if the risk is not so low.

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