Calculate hurdle rate from cost of capital and risk premium, then compare expected project return to see if it meets the required return.

Required equity return = risk-free rate + beta ร— market risk premium, plus your chosen adjustments.

Use rates with the same currency, period and real/nominal basis. CAPM estimates an equity return, not WACC. Add an inflation adjustment only if it is not already reflected in the other rates; simple addition is not a Fisher real-to-nominal conversion.

Market return minus the matching risk-free rate; not total market return.

Optional settings

Blank adds 0. Supply your chosen adjustment.

Blank adds 0. Do not duplicate inflation already in nominal rates.

Blank omits the threshold comparison.

Hurdle Rate Formula

The following examples use the calculatorโ€™s Cost of capital + additional risk premium mode. CAPM and simple-premium modes are also available; CAPM uses risk-free rate + beta ร— market risk premium, with optional explicit adjustments.

HUR = CC + RP
  • Where HUR is the Hurdle Rate (%)
  • CC is the cost of capital (%) 
  • RP is the risk premium (%) 

For the direct model, sum cost of capital and an additional risk premium that is not already included. Match currency, period and real/nominal assumptions. CAPM estimates a cost of equity, not WACC; adding an inflation adjustment to already nominal rates can double-count inflation.

How to Calculate Hurdle Rate?

The following example problems outline how to calculate Hurdle Rate.

Example Problem #1:

  1. First, determine the cost of capital (%).
    • The cost of capital (%) is given as 3.
  2. Next, determine the risk premium (%).
    • The risk premium (%) is provided as 5.
  3. Finally, calculate the Hurdle Rate using the equation above: 

HUR = CC + RP

The values provided above are inserted into the equation below and computed.

HUR = 3 + 5 = 8.00 (%)

Example Problem #2: 

For this problem, the variables required are provided below:

cost of capital (%) = 5

risk premium (%) = 6

Use the direct model: 5% + 6 percentage points = 11%. Compare an expected return only when its period and cash-flow basis match the hurdle rate.

HUR = CC + RP = ?