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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.

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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
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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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