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Business Definition for: hurdle rate
Dictionary of Accounting Terms
hurdle rate

term used in capital budgeting. Hurdle rate is the required rate of returnon a long-term investment opportunity. A proposal would be accepted when the expected rate of return exceeds the hurdle rate. The hurdle rate should equal the incremental cost of capital.

See also cost of capital
Dictionary of Finance and Investment Terms
hurdle rate

term used in the budgeting of capital expenditures, meaning the required rate of return in a discounted cash flow analysis. If the Expected Rate of Return on an investment is below the hurdle rate, the project is not undertaken. The hurdle rate should be equal to the incremental cost of capital .

Dictionary of Banking Terms
hurdle rate

  1. capital budgeting term referring to a bank's minimal rate of return in extending a loan or making an investment. Loans are funded if the bank's expected return exceeds the hurdle rate. Also called the marginalcost of funds .
  2. break-even yield ; the point at which sales equals cost.

Dictionary of Business Terms
hurdle rate

budgeting capital expenditures, the required rate of return in a discounted cash flow analysis. If the expected rate of return on an investment is below the hurdle rate, the project is not undertaken. The hurdle rate should be equal to the marginal cost of capital .

Related Terms:
cost of capital

rate of return that is necessary to maintain market value (or stock price) of a firm, also called a hurdle rate, cutoff rate,or minimum required rate of return.The firm's cost of capital is calculated as a weighted average of the costs of debt and equity funds. Equity funds include both capital stock (common stock and preferred stock) and retained earnings. These costs are expressed as annual percentage rates. For example, assume the following capital structure and the cost of each source of financing for the XYZ Company:

The overall cost of capital is computed as follows:
5.14%(.4) + 13.4%(.1) + 17.11%(.4) + 16.00%(.1) = 11.84%
The cost of capital is used for capital budgetingpurposes. Under the net present value method, the cost of capital is used as the discount rateto calculate the present value of future cash inflows. Under the Internal Rate of Return (IRR)method, it is used to make an accept-orreject decision by comparing the cost of capital with the internal rate of return on a given project. A project is accepted when the internal rate exceeds the cost of capital.

Referring Terms:
required rate of return
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 Copyright © 2006, 2003, 1998, 1995, 1991, 1987, 1985 by Barron's Educational Series, Inc. Reprinted by arrangement with Publisher.
 Copyright c 2006, 2000, 1997, 1993, 1990 by Barron's Educational Series, Inc. Reprinted by arrangement with Publisher.
 Copyright © 2007, 2000, 1997, 1987, by Barron's Educational Series, Inc. Reprinted by arrangement with Publisher.
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