Hurdle rate


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Hurdle rate

The required return in capital budgeting. For example, if a project has an expected rate of return higher than the hurdle rate, the project may be accepted. Also, the rate of current return an income trust must earn consistently in order for it to be able to maintain distributions at their current level.

Hurdle Rate

In capital budgeting, the required return for a project. That is, when a company is planning its outlays in the medium and long-term, it requires a certain rate of return on projects, because they can be quite expensive and the outlays tie up capital that can be used elsewhere. This required return is called the hurdle rate.
References in periodicals archive ?
The report highlights that corporate banks will need to adopt a segment-specific approach to setting target returns in order to create incentives aligned with equity investors' interests, as all segments cannot be measured against one single target ROE hurdle rate.
The hurdle rate determines at which level profit-sharing will take place.
The fact that Fidelity has said if the fund underperforms the hurdle rate in any year, this underperformance must be made good before any further performance fee becomes payable, makes this fund's charging structure fairer for the investor than many in the market.
In order for the government to justify the existence of the NZSF as part of its overall activities in the 2009/10 financial year, the NZSF's Guardians must achieve at least that hurdle rate of 6.
Only 25% of the retailers said they were working to take advantage of real estate deals that were becoming available to increase market share, while more than 80% of the 60% are undertaking a review of their portfolios are slowing down new store openings and/or remodels especially if the new hurdle rates are not being met.
Poterba and Summers (1995) find that the average hurdle rate used by companies at the time of the survey in Fall 1990 was 12.
For instance, if the chance of success of a project from stage 3 onward is 20 percent (one-in-five), and the usual hurdle rate is 15 percent, then the hurdle rate at gate 2 should be 75 percent.
A common measure used to set the hurdle rate is the weighted average cost of capital (WACC) of the practice.
This includes the extent to which inflation has been incorporated in the hurdle rate, what assumptions have been made regarding capital structure and whether there have been any changes in the industry since the hurdle rate was established that should be reflected in the required risk premiums.
3) This suggests that the classical hurdle rate for cat risk is the risk-free rate, which is readily observable.
Theoretically, a company's hurdle rate should be its cost of capital expressed as a percentage.
This rate of return, identified as the effective annual lease hurdle rate (K), represents the annualized return on invested cash flows that the lessee must earn to achieve total wealth equal to that of the installment purchaser at the time the lease contract matures.