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Hurdle Rate

Definition

The minimum acceptable rate of return for an investment, often equal to or above WACC.

How It Works

Projects with expected returns above the hurdle rate are accepted; those below are rejected. Risk premiums may be added for riskier projects.

Example

If WACC is 9% and a division adds a 2% risk premium, the hurdle rate is 11%.

Common Misconceptions

✗Hurdle rate is always exactly WACC
✗It never changes

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FAQs

Common questions about Hurdle Rate

Senior management, often based on WACC with adjustments for project-specific risk.

It will reject value-creating projects that earn above WACC but below the hurdle. This leads to underinvestment. Setting it too low results in accepting projects that do not earn enough to compensate investors for risk.