Hurdle rate
The hurdle rate is the minimum return a project must earn to justify investment, set at the firm's WACC for average-risk investments and raised for riskier ones. A project whose IRR clears the hurdle is expected to add shareholder value.
FrameworkDCF investment appraisal
See it move
A distribution contract with average business risk carries a 10% hurdle rate, equal to the firm's WACC; its 13% IRR clears it easily and the project is accepted. A research-stage pharmaceutical project earning the same 13% IRR faces a higher 16% hurdle because of its greater uncertainty, so it falls short and is rejected.
Check yourself
A diversified industrial group has a firm-wide WACC of 9 per cent. It is evaluating two projects: a routine upgrade of existing production equipment, and a greenfield launch into a new technology market. Which hurdle-rate treatment is most theoretically defensible?