What is a Hurdle Rate?

May 21, 20236 min read
What is a Hurdle Rate?
Share on facebookShare on TwitterShare on Linkedin

Key Takeaways

  • In investing, a hurdle rate is the minimum rate of return necessary for an investor to go ahead with a project.
  • Some companies select an arbitrary hurdle rate to discount cash flows to get to the project’s net present value (NPV). Typically, if the NPV is positive, the project is approved.
  • Because interest rates are really opportunity costs that could be earned through a different investment, hurdle rates must be compared with real interest rates.

Also known as the minimum acceptable rate of return, a hurdle rate has to do with potential investment evaluation and return rates. If an expected rate of return is above the hurdle rate, the investment is generally considered sound. But just what is a “hurdle rate?” That and more are covered below.   

What is a Hurdle Rate?

In investing, a hurdle rate is the minimum rate of return necessary for an investor to proceed with a project. The rate is determined by evaluating risk, capital costs, existing opportunities for business growth, rates of return for similar investments, and other factors. 

Note that the cost of capital is the implied rate of return (IRR) that a company anticipates on its assets, without the effect of debt. 

A risk premium, often assigned to a prospective investment, represents the expected amount of risk involved. The higher the risk, the higher the likely premium, based on the premise that the risk is of losing money, the higher the return should be. In other words, “risk” is the primary “hurdle” an investment must surmount to be worth it.

Companies usually add what is known as a risk premium – called a weighted average cost of capital (WACC) — to the overall required return and use that as their hurdle rate.

For example, say that Mike’s Yard Goods is aiming to buy a new lathe. The company surmises that with this new piece of machinery, it can increase its sales of specially made wooden products, resulting in an investment return of 11 percent. The company’s WACC  is 5 percent and the risk of not selling these seasonal products is minimal, so a low-risk premium of 3 percent is assigned. Thus, the hurdle rate is:

WACC (5 percent) + Risk Premium = 8 percent.

With an eight percent hurdle rate and an expected investment return of 11 percent, buying the new machinery would be considered a good investment.

Some companies select an arbitrary hurdle rate to discount cash flows to get to the project’s net present value (NPV). Typically, if the NPV is positive, the project is approved.

In general, employing a hurdle rate to gauge an investment’s prospects helps to avoid any bias created by any project preference. Assigning a risk factor allows the investor to utilize the hurdle rate to show whether the project has any financial promise, any assigned intrinsic value notwithstanding.

For instance, a company that had a 10 percent hurdle rate for project acceptance would likely take on a project with an IRR of fourteen percent and no major risk. Also, discounting the project’s future cash flows by that ten percent hurdle rate would result in a substantial and positive NPV, and likely project acceptance as well.

The most common way to employ the hurdle rate to assess an investment is by conducting a discounted cash flow analysis. Such an analysis uses the concept of time value of money to forecast future cash flows and subsequently discount them back to existing values to get the NPV. This first requires financial modeling on the part of the company.

Hurdle Rate Considerations

Prime considerations when it comes to hurdle rate include:

  • Risk premium. Assigning a value to the project’s expected risk. In general, riskier investments have higher hurdle rates than those that pose less risk.
  • Inflation rate. Mild inflationary levels will likely affect the final rate by one to two percent. If inflationary levels are especially high, inflation could be the number one consideration.
  • Interest rate. Interest rates are really opportunity costs that could be earned through a different investment. Therefore, hurdle rates must be compared with real interest rates. 
  • Base rate of return. In general, this is considered the interest rate offered on a risk-free investment like a 10-year Treasury bond.
  • Alternative investments. Even if an investment will probably beat the hurdle rate, approval may be contingent upon exceeding returns from other investment opportunities, including alternatives such as art and real estate. After all, private market alternatives have outperformed stocks in every economic downturn of the last 15 years.

How to Calculate Hurdle Rate?

The most common formula for calculating the hurdle rate is Cost of Capital + Risk Premium = hurdle rate. So, if an investor’s cost of capital equals five percent, and the risk premium for a certain investment is three percent, the hurdle rate would be eight percent (three percent plus eight percent). 

What is an Example of a Hurdle Rate?

Say, for example, that Company ABC is considering investing in a new plant. It expects that, with the enhanced capacity, it can heighten sales, resulting in an eight percent annual return. Its WACC is four percent, meaning that investors anticipate profits of four cents on the dollar. The company is at low risk of anemic sales from increased production, setting that premium at two percent.

Therefore, WACC (four percent) + Risk Premium (two percent) = a hurdle rate of six percent.

Because Company ABC anticipates the new factory will produce a higher rate of return, it can invest with confidence.

What is the Relationship Between Hurdle Rate and NPV?

Both should be considered when taking on an investment but the two can be inversely related. In other words, while a hurdle rate can be low, an investor may believe that means the NPV is high. However, that is not always necessarily the case.

What are Some Limitations of Hurdle Rate?

As with most anything, there are limitations when it comes to hurdle rate:

  • The rate can misjudge the project amount. The rate can be off regarding the actual amount a project costs. In fact, the rate could turn down large projects that could produce more cash but at a lower return rate. 
  • Hurdle rates can excessively favor the rate of return. This is true even if the dollar amount (NPV) is relatively small. 
  • Capital costs may change over time. This is an issue because such costs are usually the basis of a hurdle rate.

Hurdle Rates in Alternative Investments

Hurdle rates could actually be lower with a diversified investment portfolio, which can decrease overall risk since asset classes are varied. If a portion of one’s holdings are underperforming, another has a chance to do better.  In fact, portfolio diversification is essential to successful investing.   

Rise above Volatility

Diversify beyond the stock market with Yieldstreet.

Alternative investments can be a good way to help accomplish this. Traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split, incorporating alternative assets, may make a portfolio less sensitive to public market short-term swings. 

Real estate, private equity, venture capital, digital assets, precious metals and collectibles are among the asset classes deemed “alternative investments.” Broadly speaking, such investments tend to be less connected to public equity, and thus offer potential for diversification. Of course, like traditional investments, it is important to remember that alternatives also entail a degree of risk. 

In some cases, this risk can be greater than that of traditional investments.

This is why these asset classes were traditionally accessible only to an exclusive base of wealthy individuals and institutional investors buying in at very high minimums — often between $500,000 and $1 million.  These people were considered to be more capable of weathering losses of that magnitude, should the investments underperform.

However, Yieldstreet has opened a number of carefully curated alternative investment strategies to all investors. While the risk is still there, the company offers help in capitalizing on areas such as real estate, legal finance, art finance and structured notes — as well as a wide range of other unique alternative investments. 

Learn more about the ways Yieldstreet can help diversify and grow portfolios.


Even with its limitations, the hurdle rate can be an important factor in guiding investment decisions. Note that the rate also can be used with alternative investments, which can also serve to diversify portfolios and decrease overall risk.

We believe our 10 alternative asset classes, track record across 470+ investments, third party reviews, and history of innovation makes Yieldstreet “The leading platform for private market investing,” as compared to other private market investment platforms.

1 Past performance is no guarantee of future results. Any historical returns, expected returns, or probability projections may not reflect actual future performance. All securities involve risk and may result in significant losses.

3 "Annual interest," "Annualized Return" or "Target Returns" represents a projected annual target rate of interest or annualized target return, and not returns or interest actually obtained by fund investors. “Term" represents the estimated term of the investment; the term of the fund is generally at the discretion of the fund’s manager, and may exceed the estimated term by a significant amount of time. Unless otherwise specified on the fund's offering page, target interest or returns are based on an analysis performed by Yieldstreet of the potential inflows and outflows related to the transactions in which the strategy or fund has engaged and/or is anticipated to engage in over the estimated term of the fund. There is no guarantee that targeted interest or returns will be realized or achieved or that an investment will be successful. Actual performance may deviate from these expectations materially, including due to market or economic factors, portfolio management decisions, modelling error, or other reasons.

4 Reflects the annualized distribution rate that is calculated by taking the most recent quarterly distribution approved by the Fund's Board of Directors and dividing it by prior quarter-end NAV and annualizing it. The Fund’s distribution may exceed its earnings. Therefore, a portion of the Fund’s distribution may be a return of the money you originally invested and represent a return of capital to you for tax purposes.

5 Represents the sum of the interest accrued in the statement period plus the interest paid in the statement period.

6 The internal rate of return ("IRR") represents an average net realized IRR with respect to all matured investments, excluding our Short Term Notes program, weighted by the investment size of each individual investment, made by private investment vehicles managed by YieldStreet Management, LLC from July 1, 2015 through and including July 18th, 2022, after deduction of management fees and all other expenses charged to investments.

7 Investors should carefully consider the investment objectives, risks, charges and expenses of the Yieldstreet Alternative Income Fund before investing. The prospectus for the Yieldstreet Alternative Income Fund contains this and other information about the Fund and can be obtained by emailing [email protected] or by referring to www.yieldstreetalternativeincomefund.com. The prospectus should be read carefully before investing in the Fund. Investments in the Fund are not bank deposits (and thus not insured by the FDIC or by any other federal governmental agency) and are not guaranteed by Yieldstreet or any other party.

8 This tool is for informational purposes only. You should not construe any information provided here as investment advice or a recommendation, endorsement or solicitation to buy any securities offered on Yieldstreet. Yieldstreet is not a fiduciary by virtue of any person's use of or access to this tool. The information provided here is of a general nature and does not address the circumstances of any particular individual or entity. You alone assume the sole responsibility of evaluating the merits and risks associated with the use of this information before making any decisions based on such information.

9 Statistics as of the most recent month end.

300 Park Avenue 15th Floor, New York, NY 10022


No communication by YieldStreet Inc. or any of its affiliates (collectively, “Yieldstreet™”), through this website or any other medium, should be construed or is intended to be a recommendation to purchase, sell or hold any security or otherwise to be investment, tax, financial, accounting, legal, regulatory or compliance advice, except for specific investment advice that may be provided by YieldStreet Management, LLC pursuant to a written advisory agreement between such entity and the recipient. Nothing on this website is intended as an offer to extend credit, an offer to purchase or sell securities or a solicitation of any securities transaction.

Any financial projections or returns shown on the website are estimated predictions of performance only, are hypothetical, are not based on actual investment results and are not guarantees of future results. Estimated projections do not represent or guarantee the actual results of any transaction, and no representation is made that any transaction will, or is likely to, achieve results or profits similar to those shown. In addition, other financial metrics and calculations shown on the website (including amounts of principal and interest repaid) have not been independently verified or audited and may differ from the actual financial metrics and calculations for any investment, which are contained in the investors’ portfolios. Any investment information contained herein has been secured from sources that Yieldstreet believes are reliable, but we make no representations or warranties as to the accuracy of such information and accept no liability therefore.

Private placement investments are NOT bank deposits (and thus NOT insured by the FDIC or by any other federal governmental agency), are NOT guaranteed by Yieldstreet or any other party, and MAY lose value. Neither the Securities and Exchange Commission nor any federal or state securities commission or regulatory authority has recommended or approved any investment or the accuracy or completeness of any of the information or materials provided by or through the website. Investors must be able to afford the loss of their entire investment.

Investments in private placements are speculative and involve a high degree of risk and those investors who cannot afford to lose their entire investment should not invest. Additionally, investors may receive illiquid and/or restricted securities that may be subject to holding period requirements and/or liquidity concerns. Investments in private placements are highly illiquid and those investors who cannot hold an investment for the long term (at least 5-7 years) should not invest.

Alternative investments should only be part of your overall investment portfolio. Further, the alternative investment portion of your portfolio should include a balanced portfolio of different alternative investments.

Articles or information from third-party media outside of this domain may discuss Yieldstreet or relate to information contained herein, but Yieldstreet does not approve and is not responsible for such content. Hyperlinks to third-party sites, or reproduction of third-party articles, do not constitute an approval or endorsement by Yieldstreet of the linked or reproduced content.

Investing in securities (the "Securities") listed on Yieldstreet™ pose risks, including but not limited to credit risk, interest rate risk, and the risk of losing some or all of the money you invest. Before investing you should: (1) conduct your own investigation and analysis; (2) carefully consider the investment and all related charges, expenses, uncertainties and risks, including all uncertainties and risks described in offering materials; and (3) consult with your own investment, tax, financial and legal advisors. Such Securities are only suitable for accredited investors who understand and are willing and able to accept the high risks associated with private investments.

Investing in private placements requires long-term commitments, the ability to afford to lose the entire investment, and low liquidity needs. This website provides preliminary and general information about the Securities and is intended for initial reference purposes only. It does not summarize or compile all the applicable information. This website does not constitute an offer to sell or buy any securities. No offer or sale of any Securities will occur without the delivery of confidential offering materials and related documents. This information contained herein is qualified by and subject to more detailed information in the applicable offering materials. Yieldstreet™ is not registered as a broker-dealer. Yieldstreet™ does not make any representation or warranty to any prospective investor regarding the legality of an investment in any Yieldstreet Securities.

YieldStreet Inc. is the direct owner of Yieldstreet Management, LLC, which is an SEC-registered investment adviser that manages the Yieldstreet funds and provides investment advice to the Yieldstreet funds, and in certain cases, to retail investors. RealCadre LLC is also indirectly owned by Yieldstreet Inc. RealCadre LLC is a broker-dealer registered with the Securities and Exchange Commission (“SEC”) and a member of the Financial Industry Regulatory Authority (“FINRA”) and the Securities Investor Protection Corporation (“SIPC”). Information on all FINRA registered broker-dealers can be found on FINRA’s BrokerCheck. Despite its affiliation with Yieldstreet Management, LLC, RealCadre LLC has no role in the investment advisory services received by YieldStreet clients or the management or distribution of the Yieldstreet funds or other securities offered on our through Yieldstreet and its personnel. RealCadre LLC does not solicit, sell, recommend, or place interests in the Yieldstreet funds.

Yieldstreet is not a bank. Certain services are offered through Plaid, Orum.io and Footprint and none of such entities is affiliated with Yieldstreet. By using the services offered by any of these entities you acknowledge and accept their respective disclosures and agreements, as applicable.

Investment advisory services are only provided to clients of YieldStreet Management, LLC, an investment advisor registered with the Securities and Exchange Commission, pursuant to a written advisory agreement.

Our site uses a third party service to match browser cookies to your mailing address. We then use another company to send special offers through the mail on our behalf. Our company never receives or stores any of this information and our third parties do not provide or sell this information to any other company or service.

Read full disclosure