imported>Doug Williamson |
imported>Doug Williamson |
| Line 1: |
Line 1: |
| A hurdle rate is an organisation's minimum rate of return used for determining the viability of a proposed investment or other project.
| | ''Capital adequacy''. |
|
| |
|
| | | Reserve Requirement Ratio. |
| The hurdle rate can be used in two ways:
| |
| | |
| *As a target Internal rate of return, that proposals need to exceed.
| |
| | |
| *As a discount rate (r) to apply in Net present value analysis, to discount the future cash flows.
| |
| | |
| | |
| :<span style="color:#4B0082">'''Example 1 - Internal Rate of Return (IRR)'''</span>
| |
| | |
| :Our organisation's hurdle rate is 7%.
| |
| | |
| :A proposal has an Internal rate of return of 5%.
| |
| | |
| :The IRR is lower than our hurdle rate.
| |
| | |
| :Accordingly, the proposal is rejected.
| |
| | |
| | |
| | |
| :<span style="color:#4B0082">'''Example 2 - Net Present Value (NPV)'''</span>
| |
| | |
| :Our organisation's hurdle rate is 7%.
| |
| | |
| :We use 7% to discount a proposal's future cash flows.
| |
| | |
| :If the Net present value is less than 0, the proposal will be rejected.
| |
| | |
| | |
| | |
| Hurdle rates are usually set with reference to the organisation's weighted average cost of capital.
| |
| | |
| This will depend on a number of factors, including currency and the risk free rate of return in the relevant currency.
| |
| | |
| | |
| Hurdle rates may be adjusted for different classes of project, with different levels of risk.
| |
| | |
| Riskier projects, or classes of project, would be allocated a higher hurdle rate.
| |
|
| |
|
|
| |
|
| == See also == | | == See also == |
| * [[Cost of capital]] | | * [[Capital adequacy]] |
| * [[Discount rate]] | | * [[Reserves]] |
| * [[Internal rate of return]]
| |
| * [[Net present value]]
| |
| * [[Rate of return]]
| |
| * [[Risk free rate of return]]
| |
| * [[Risk premium]]
| |
| * [[Weighted average cost of capital]]
| |
| | |
| [[Category:The_business_context]]
| |
| [[Category:Corporate_finance]]
| |
| [[Category:Investment]]
| |
