What does the term "hurdle rate" mean in investment analysis?

The term "hurdle rate" refers to the minimum acceptable return on an investment that a project or investment must achieve to be considered viable or worth the risk. This threshold is set by investors or company management, reflecting their required rate of return that compensates them for the risk associated with the investment.

By establishing a hurdle rate, investors are able to evaluate whether a potential investment opportunity meets their return expectations when compared to other risks and opportunities available to them. If the expected return of a project exceeds this hurdle rate, it is often pursued; if it does not, it may be rejected. This approach aids in capital allocation decisions, ensuring that resources are directed towards investments that are likely to provide adequate returns given their risk profile.

In investment analysis, understanding the hurdle rate is crucial because it serves as a benchmark for assessing the potential success of investment projects.