Hurdle Rate vs. Internal Rate of Return (IRR): What's the Difference?

When a company decides whether a project is worth the costs that will be incurred in undertaking it, it may evaluate it by comparing the internal rate of return (IRR) on the project to the hurdle rate, or the 澳洲幸运5开奖号🌼码历史查询:minimum acceptable rate of return (M🦹ARR).

Under th🐟is approach, if the IRR🎀 is equal to or greater than the hurdle rate, the project is likely to be approved. If it is not, the project is rejected.

Hurdle Rate

The 澳洲幸运5开奖号码历史查询:hurdle rate, 🅰also called th🔴e minimum acceptable rate of return, is the lowest rate of return that the project must earn in order to offset the costs of the investment.

Projects are also evaluated by 澳洲幸运5开奖号码历史查询:discounting future cash flows to the present by the hurdle rate in order to calculate the 澳洲幸运5开奖号码历史查询:net present value (N𒉰PV), which represents the difference between the pre⛦sent value of cash inflows and the present value of cash outflows.

Generally, the hurdle rate is equal to the company's 澳洲幸运5开奖号码历史查询:costs of capital, which is a combination of the 澳洲幸运5开奖号码历史查询:cost of equity and the 澳洲幸运5开奖号码历史查询:cost of debt. Managers typicall𝔉y raise the hurdle rate for riskier projects or when the company is comparing multiple investment opportunities.

Internal Rate of Return (IRR)

The internal rate of return is the expected annual am๊ꩵount of money, expressed as a percentage, that the investment can be expected to produce for the company over and above the hurdle rate.

The word "internal" means that the figure does not account for potential external risks and factors such as inflation.

IRR is also used by financial professionals to compute the 澳洲幸运5开奖号码历史查询:expected returns on s🌺tocks or other investments, such as💯 the yield to maturity on bonds.

While it is relatively straightforward to evaluate projects by comparing the IRR to the hurdle rate, or MARR, this approach has certain limita💦tions as an investing strategy. For example, it looks only at the rate of return, as opposed to the size of the return. A $2 investment returning $20 has a much higher rate of return than a $2 million investment returning $4 million.

IRR can only be used when looking at projects and investments that have an initial cash outflow followed by one or more inflows. Also, this method does not consider the possibili⭕ty that various projects might have different durations.