Final answer:
The cost of capital is referred to as the 'hurdle' rate in capital budgeting because it represents the minimum rate of return that a project must generate to be considered acceptable.
Step-by-step explanation:
The cost of capital is referred to as the "hurdle" rate in capital budgeting because it represents the minimum rate of return that a project must generate in order to be considered acceptable for investment. Just like a hurdle in a race, the cost of capital acts as a barrier that the project's return must surpass in order to be deemed worthwhile. If the project's rate of return is lower than the cost of capital, it is not considered financially viable.
For example, let's say a company has a cost of capital of 10%. Any project that has a rate of return lower than 10% would not be pursued by the company because it does not meet the hurdle rate. The cost of capital acts as a benchmark against which potential investments are evaluated, ensuring that only projects with a high enough return are undertaken.