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

Hurdle rate = cost of capital + a risk premium not already in that cost. Match the period and nominal/real basis.

Extra return you require for this projectโ€™s risk. Do not repeat risk already in the cost of capital.

Optional settings
Blank omits the threshold comparison.

Hurdle Rate Formula

The following examples use the calculatorโ€™s default Cost of capital + 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 = ?