hurdle rate

A hurdle rate is the required rate of return above which an investment makes sense and below which it does not.

A hurdle rate is the required rate of return above which an investment makes sense and below which it does not.

In capital budgeting, hurdle rate is the minimum rate a company expects to earn by investing in a project. The hurdle rate may also be referred to as the required rate of return or target rate. For a project to be accepted, the internal rate of return must meet or exceed the hurdle rate. To compensate for risk, the higher the risk on an investment, the higher the hurdle rate.

It has grown increasingly important for CIOs and IT executives to calculate and relay the hurdle rate of any given project or product when presenting budget plans or making requests to the CEO or CFO for funding. 

See also: enterprise risk management, risk analysis, risk assessment framework

This was first published in July 2013

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