What is hurdle rate?

In capital budgeting, the term hurdle rate is the minimum rate that a company wants to
earn when investing in a project. Therefore, the hurdle rate is also referred to as the
company's required rate of return or target rate. For a company to further consider a
project, its internal rate of return must equal or exceed the hurdle rate.
The hurdle rate is also used to discount a project's future cash flows to its net present
value.
The absolute minimum hurdle rate should be the company's cost of capital (a blend of
the cost of debt and the cost of equity). However, the hurdle rate is usually larger than
the cost of capital when the company has many investment opportunities and for
projects that have a higher level of risk.