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A company's required rate of return, typically its cost of capital is called the Hurdle rate.
A hurdle rate is the required minimum rate of return on a project or investment. Companies can use hurdle rates to determine whether or not to explore a specific project. Higher hurdle rates are associated with riskier projects, while lower rates are associated with lower risk.
In a discounted cash flow analysis, investors use a hurdle rate to determine the net present value of a particular investment. Companies frequently utilize their weighted average cost of capital (WACC) as the hurdle rate.
In the business world, hurdle rates are extremely important, particularly once it relates to future ventures and projects. Companies decide whether or not to undertake major projects based on the degree of associated risk. The investment is deemed reasonable if the expected rate of return exceeds the hurdle rate. If the rate of return is lower than the threshold, the investor may decide not to proceed. A break-even yield is another term for a hurdle rate.
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