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.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

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.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved
References in periodicals archive ?
One basic principle of investing states that an investment can only add value if it earns more than its hurdle rate. Following this principle, a company must generate return on equity above its opportunity cost in order to create intrinsic value into its share price.
Raising the Hurdle Rate. 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.
Therefore, the high variation in hurdle rates within the company and industry sectors found in surveys indicates that hurdle rates are not directly linked to the cost of capital.
The above methodology fits fairly neatly into the modelling problem concerning evaluation of hurdle rates for R&D projects.
Rather than use a build-up approach in corporate acquisition analysis, many companies employ corporate 'hurdle rates' or 'threshold rates of return.' 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.
Yes, the firm can alter its capital budgeting policy by raising internal hurdle rates. 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).
When hurdle rates increase, share prices tend to fall because the value of growth portion enlarges to the point beyond rational expectations.
This result provides a testable prediction regarding the cross-sectional variation in firms' choices of hurdle rates for approving capital investment projects.