Where does a 35% hurdle rate actually come from?
Venture investors quote 30% to 40% returns, and corporate finance teams borrow the same number for internal projects. It is not greed: a hurdle rate has to cover the cost of money and the chance the project never reaches the finish line. This sheet unpacks the two numbers hiding inside that figure and shows the hurdle that is actually fair for your project.
Finance Intermediate Data Table free
After you install, this is the model to open.
What Return Should a Risky Project Have to Clear?
- In your spreadsheet, click the Sortia icon in the strip of icons down the right-hand edge. No strip? Click the arrow at the bottom-right to open it. You can also use Extensions, then Sortia, then Open Sortia.
- Click Start from a template and put that name in the search box.
- Pick the card with that name and click Load this template. It arrives on a new tab with real numbers already in it.
The answer
At the defaults the fair hurdle is 18.5%, and the flat 35% turns a clearly good project into a rejected one.
- Fair hurdle rate
- 18.5% vs the 35% quoted
- Project NPV at the fair hurdle
- +$2.25M approve
- Project NPV at a flat 35%
- -$1.24M reject
- Failure rate 35% assumes
- 19.3%/yr 65.7% dead within 5 years
A 9% cost of capital and an 8% annual chance of the project being killed add up to a fair hurdle of 18.5%, not 35%, even though that kill rate means the project has a 48.7% chance of dying at some point over eight years. Judged fairly the project is worth +$2.25M; judged at a flat 35% it looks like -$1.24M, a $3.49M swing, and 64.5% of that damage falls on years 5 through 8 alone. A flat 35% hurdle quietly assumes your project dies 19.3% of the time every single year, so unless that is true of your project, the number is not yours to use.
The model
One identity does all the work: fair hurdle = (discount rate + annual failure probability) / (1 - annual failure probability). The sheet applies it to an eight-year innovation project and then prices the same cash flows twice, once at the fair hurdle and once at a borrowed flat 35%.
| Discount rate (WACC), annual | 9% |
| Project failure probability, annual | 8% (swept 2% to 30%) |
| Horizon | 8 years |
| Flat hurdle rate quoted by finance | 35% |
| Upfront investment cost | $6,000,000 |
| Cash flows, years 1 to 8 | $0.8M ramping to $3.0M ($18.8M total) |
Once it is in your sheet
- The model arrives with real numbers in it and runs as it stands, so you can press the button first and understand it second.
- Change the numbers to yours. The sheet marks which cells are inputs and which hold formulas, and most labels carry a note explaining the row.
- Press the run button at the bottom of the panel. It is labeled for the tool you are in, and the result lands on its own tab, with a written reading of it beside the figures.
Never used Google Sheets? Start here goes the whole way, in seven steps, and assumes nothing.
Next question
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- What does ignoring correlation cost you?
Every model like this one, and the method behind them: What-if analysis in Google Sheets.