What is a hurdle rate?
A hurdle rate is an internal rate of return common for one’s industry or project domain. For instance an IRR of 15 percent might be standard for a food processing investment (relatively safe) whereas an IRR of 35 percent might be standard for an amusement park investment (more risky). In other words, if you’re going to take on a lot of risk (quantified or not) you had better be sure that you’re going to get paid well for it, through a higher rate of return. In either scenario. after a decision-maker reviewed the qualitative assumptions behind such a quantitative analysis, she might seek outside perspectives on realistic hurdle rates for the industry or type of project under consideration. She would then compare those externally defined hurdle rates to the internal rate of return presented for the specific project. The idea is for the project’s specific IRR to clear the hurdle by being equal to or higher than the externally defined industry or domain rate of return.
