Hurdle Rate — definition
Minimum rate of return a project must achieve to be considered acceptable for investment, commonly set with reference to a company's cost of capital and project risk.
Hurdle rates are often set above the weighted average cost of capital to build in a risk premium, and may vary by project type, geography or business unit to reflect differing risk levels. Projects with an IRR below the hurdle rate are typically rejected or deprioritised.
Why it matters to industrial buyers
A clearly defined hurdle rate gives capital committees a consistent, objective screen for comparing and approving projects across a diverse investment portfolio.
Key reference points
Typical range
Industrial hurdle rates are commonly in the range of 8-15 percent, varying with company cost of capital and perceived project risk.
Commonly confused with
Cost of capital
Cost of capital reflects the blended cost of a company's debt and equity funding; hurdle rate is typically set at or above cost of capital to include a risk margin.
How it is used in practice
A project with a projected IRR of 9 percent is rejected because it falls below the company's 12 percent hurdle rate.
Frequently asked questions
Is the hurdle rate the same for all projects?
Not necessarily; many organisations apply higher hurdle rates to riskier project categories, such as new markets or unproven technology.
Who sets the hurdle rate?
It is typically set by senior finance leadership or the board, informed by the company's cost of capital and strategic risk appetite.
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Related terms
Internal Rate of Return (IRR)
Discount rate at which the net present value of a project's projected cash flows equals zero, used to express an investment's expected annualised return.
Net Present Value (NPV)
Sum of a project's projected future cash flows, each discounted to present value at a chosen rate, minus the initial capital investment.
Capital Allocation
Process by which an organisation decides how to distribute available capital among competing investment opportunities, including new projects, maintenance and expansion.
Payback Period
Length of time required for the cumulative cash flows generated by an investment to equal its initial capital outlay, expressed in months or years.
Discounted Cash Flow (DCF)
Valuation method that estimates the present value of an asset or project by discounting its projected future cash flows using a chosen discount rate.
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Reference content only. Global B2B Group is independent of equipment manufacturers and financing institutions; definitions are provided for education and do not constitute engineering, financial or legal advice.