imported>Doug Williamson |
imported>Doug Williamson |
| Line 1: |
Line 1: |
| A hurdle rate is an organisation's rate of return used for determining the viability of a proposed investment or other project.
| | ''Financial reporting - balance sheet - liabilities.'' |
|
| |
|
| | | Amounts which are due to be paid by a reporting entity. |
| 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.
| |
| | |
| They 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]] | | * [[AP]] |
| * [[Discount rate]] | | * [[Balance sheet]] |
| * [[Internal rate of return]] | | * [[Creditors]] |
| * [[Net present value]] | | * [[Liabilities]] |
| * [[Rate of return]] | | * [[Payables finance]] |
| * [[Weighted average cost of capital]] | | * [[Receivables]] |
| | * [[Trade payables]] |
|
| |
|
| [[Category:The_business_context]] | | [[Category:Accounting,_tax_and_regulation]] |
| [[Category:Corporate_finance]]
| |
| [[Category:Investment]]
| |
