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Finance: What is Hurdle Rate? 62 Views


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Description:

One of the toughest jobs any head coach for the NFL or NBA has is: who makes the final team roster? Is there a level of production that warrants the inherent risk? Is getting a proven high potential scorer worth that player’s poor defense? Is the linebacker who gives quarterbacks sleepless nights worth his off-the-field tabloid escapades? The risk and reward factors are calculated to create a hurdle rate of return, which is the minimum amount of return anticipated to make the risk worth the effort to keep the asset or project. In the case of hedge funds, where the manager gets incentive bonuses for performance above agreed upon benchmarks, the hurdle rate is the nut that needs to be covered before bonuses kick in.

Language:
English Language

Transcript

00:00

Finance allah shmoop shmoop what is ah hurdle rate Well

00:06

a hurdle rate refers to the investment return minimum that

00:10

an investment project requires for it to be worth taking

00:15

the risk and effort to do it in the first

00:17

place All right what does that really mean Well you're

00:20

the new ceo of baby's first chainsaw inc a project

00:23

manager present to you the opportunity to open a new

00:27

line of business called grand pas last chain saw going

00:31

into that business will cost you one hundred million box

00:33

of initial investment in large print labeling walker accessible attachments

00:38

jittery hand stabilizers and some extra denture cream You as

00:43

ceo are looking at eight other projects you can afford

00:47

to do on ly one and the best of the

00:50

eight other projects is a similar product called the unhinged

00:54

midlife crisis chainsaw which has been garnering a lot of

00:58

early interest That project has return rate of fourteen percent

01:02

so the project manager presenting grandpas last chainsaw now has

01:06

a hurdle rate that must be above the highest last

01:10

hurdle or fourteen percent fourteen percent annualized return got it

01:14

and that's as presented by the project manager pitching investment

01:18

in the mid life crisis model meaning they think it'll

01:21

return fourteen percent a year on the investment Got it

01:24

Whichever of those eight competitive project managers presents the most

01:28

believable projections for sales and profits that exceed the others

01:32

well they'll soon become king of the family chainsaw market

01:36

And the ones who don't well let's just say they 00:01:38.855 --> [endTime] use a few extra bodies over in product development

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