Hurdle Rate

Formal

The minimum rate of return on an investment - expressed as an annual percentage - that a company needs to generate in order to approve incremental spend. This minimum is imposed because companies themselves pay % interest for raising monies, and need to generate above this hurdle rate to account for risk etc. Some investment banks require at least 20% annual returns on their proposed investment, whereas some food companies need as little as 4%.

Real-world Example

A company sets a hurdle rate of 12% for new projects. A proposed investment forecast to return only 9% gets rejected, because it doesn't clear the minimum bar the company requires to proceed.