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Finance Glossary

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Hurdle Rate

Definition:

When trying to make decisions about investments, people come up with all kinds of rules. For example, they might want to make a certain amount in returns or they might want to keep risk low.

One rule that companies use when deciding whether to pony up cash for an opportunity is the hurdle rate. It just means the minimum percent return on investment that the opportunity must surpass in order to get funded. If an investment or opportunity is expected to create returns above the hurdle rate, the company comes up with money for the project. If not, it's scrapped. 

Example

A company thinks about building a condo building. One lady person in a suit says: "We think this building will cost $100 million all in, and in 7 years we'll sell it for $200 million. Our cost of capital is 5% and our hurdle rate is 7%; in this case, the investment would return 10% so it passes our hurdle rate." The CEO says: "Let's do it, baby."