Hurdle rate can also be understood as ‘Opportunity cost’. If I have usd 100 and the best way I can invest is stock market at 17% IRR, then this becomes my hurdle rate to alternatively invest somewhere else. Any company trying to get this USD 100 from me needs to convince me that I can get more than 17% by investing in them.
Similarly, a Company needs to define its hurdle rate or minimum return reqd by investing a project. For an entrepreneur, a hurdle rate is the salary he is earning while working as an employee in a firm. He needs to earn more than this hurdle rate to justify his existence ( financially) as an entrepreneur else he is better off working as an employee. His salary is the ‘opportunity cost’ for him to be an entrepreneur.
