Definition
A project’s hurdle rate is the established minimum rate of return at which investment is approved. [1]
When determining the hurdle rate, several key factors are taken into account: [2]
- Risk premium: Higher-risk projects typically demand higher risk premiums.
- Inflation rate: Inflation can erode the value of returns over time. Including the inflation rate ensures that the return on the investment exceeds the nominal cost of capital and keeps pace with the rising cost of goods and services.
- Interest rate: The interest rate on the borrowed capital forms a baseline for the hurdle rate since the investment must generate enough return to cover this cost.
from wallstreetmojo.com
See Also
References
- Common Language in Marketing Project, 2016.
- Investopedia,.investopedia.com/terms/h/hurdlerate.asp