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 ?
75% of the retailers surveyed said they were raising the required hurdle rate for real estate capital remodels and relocates, and a number described how were planning to defer or cancel the projects that did not meet their more stringent internal rates of return guidelines.
Keywords: capital budgeting; empire-building; residual income; hurdle rates.
Consistent with prior expectations, we found self-set hurdle rates to be an effective control mechanism resulting in significantly lower levels of escalation of commitment.
Figure VI shows the bandwidth of hurdle rates that still pick 90% of the enterprise value.
However, it is still useful to look at the average information, since it emphasizes the four-dimensional nature of the problem of setting hurdle rates as a function of stage, namely variations in stage time, magnitude of investment, changing interest rate structure or cost of capital, and finally risk profile.
Hurdle rates - the minimum rates of return needed to justify an investment - are typically established at senior management levels within an organization, and tend to remain fairly static in the near term, although they can change over time to reflect changes in general economic conditions or industry trends.
At first blush, an increase in hurdle rates would seem to do little to conserve on internal funds.
In addition to clearing our hurdle rates, the bid packages for these properties offered investor safeguards, including a management contract that effectively provided a revenue floor; an allowance for renegotiating union and other existing contracts; and provisions for protection against currency fluctuations and for the repatriation of profits.
companies still use hurdle rates of 12% or more to justify capital investments, according to a survey of 612 companies conducted by the Institute of Management Accountants (IMA).
This result provides a potentially testable prediction regarding cross-sectional variation in firms' choices of hurdle rates for approval of capital investment projects.
Investments are made under conservative financial guidelines and hurdle rates and are funded with internal cash.