Certified Management Accountant Practice Exam

Question: 1 / 430

What is the hurdle rate?

The maximum allowable cost of equity

The minimum acceptable rate of return for an investment

The hurdle rate is defined as the minimum acceptable rate of return for an investment. This rate serves as a benchmark that an investment must meet or exceed for it to be considered worthwhile. In capital budgeting and project evaluation, the hurdle rate is crucial because it helps determine whether to proceed with a project or investment opportunity. If the expected return exceeds this rate, the investment is typically deemed favorable; if it falls below, it may not be justifiable.

This concept is essential in investment decision-making because it reflects the opportunity cost of capital and accounts for the risk associated with the investment. Organizations often set their hurdle rates based on the weighted average cost of capital, required return on equity, and other risk factors that affect the potential return of an investment.

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The average return of all investments in the firm

The optimum financing cost for new projects

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