Listen to a Business English Dialogue About Hurdle rate
Ashley: Hi Allison, have you ever heard of the term “hurdle rate” in finance?
Allison: Hi Ashley! Yes, I have. It’s the minimum rate of return that a project must generate to be considered acceptable or worth pursuing.
Ashley: Exactly. Companies often use hurdle rates to evaluate investment opportunities and compare them against their cost of capital. Have you encountered any specific hurdle rates in your work or studies?
Allison: Not yet, but I’ve learned about how companies calculate their hurdle rates based on factors like risk, opportunity cost, and the time value of money. It’s an important concept for making informed financial decisions.
Ashley: Absolutely. Hurdle rates help companies prioritize investments and allocate resources efficiently. Understanding them can also help individuals assess the potential returns and risks of their own investment opportunities.
Allison: That’s true. It’s essential to consider the hurdle rate when evaluating whether an investment meets the company’s financial objectives. Do you have any tips for determining an appropriate hurdle rate?
Ashley: One approach is to use the company’s cost of capital as a starting point and adjust it based on the specific risks and circumstances of the investment. It’s also crucial to regularly review and update hurdle rates to reflect changes in the market and business environment.
Allison: Thanks for sharing that insight, Ashley. It sounds like calculating hurdle rates requires careful analysis and consideration of various factors. I’ll keep that in mind as I continue to learn more about finance.
Ashley: You’re welcome, Allison. Understanding hurdle rates can be complex, but it’s an important aspect of financial decision-making. If you ever have more questions about hurdle rates or any other financial topic, feel free to reach out!