Cost of capital remains one of the most important benchmarks in corporate finance, shaping how organizations evaluate investments, allocate capital and measure value creation. In stable environments, the calculation remains stable; however, in times of change, the inputs behind that calculation — from interest rates to geopolitical risk — can shift rapidly.

The 2026 AFP Cost of Capital Survey finds that most organizations continue to rely on their calculated cost of capital as the baseline hurdle rate for evaluating projects, while others build additional buffers to account for execution risk and market uncertainty. At the same time, finance teams are incorporating new tools, such as real-time analytics and scenario analysis, to refine their estimates and stress-test their assumptions.

Discussions with members of AFP’s MegaCap Group and FP&A Advisory Council suggest that while the models remain familiar, the context around them is evolving. Interest-rate volatility, global trade dynamics and shifting regulatory conditions are all influencing how companies think about risk and the returns required to justify new investments.

Cost of capital as the benchmark for investment decisions

Most organizations continue to use their calculated cost of capital as the baseline for evaluating investments. According to the survey, 62% of organizations use their calculated cost of capital as the standard hurdle rate, while 38% set a hurdle rate above the cost of capital to account for additional risk.

Organizations that establish hurdle rates above the cost of capital often do so to reflect project-specific uncertainties or execution risk. At the same time, many practitioners caution against frequent adjustments to hurdle rates, emphasizing the importance of maintaining a consistent benchmark and addressing risks through project assumptions.

“I generally avoid adjusting the hurdle rate for execution risk, complexity or short-term volatility, and instead reflect those risks through cash-flow scenarios,” said finance leader Julian Scutari. “Outside of the annual review, I view hurdle rate adjustments as exceptional and triggered only when the risk is material, structural and expected to persist over the mid to long term.”

Another finance leader noted that hurdle-rate changes tend to coincide with major shifts in capital structure or financing activity: “High volatility can push the hurdle rate to the top threshold of a stress test. Adjustments may also follow major acquisitions or mergers, bond issuance or significant changes to the debt-to-equity ratio.”

When organizations adjust hurdle rates

Although many companies maintain relatively stable hurdle rates, certain events can trigger adjustments. The survey indicates that 51% of organizations adjust hurdle rates in response to changes in market conditions, while 48% adjust them when evaluating new business initiatives or large investments.

Large capital commitments and mergers and acquisitions often require additional analysis to account for evolving risks. One practitioner described how project scale influences whether hurdle rates are adjusted: “Most of our mid- to lower-level investments, such as R&D and manufacturing projects, we hold the hurdle rate steady to allow for less noise in comparisons. For extremely large projects and M&A activity, we will make adjustments based on many of the mentioned risk types, but will build them into model variables when possible.”

Other organizations adjust hurdle rates in response to competitive pressures. “Competitive pressures require us to stay current with new capital requirements being pursued by others,” said Lawrence Maisel, President of DecisionVu Group, Inc.

Another practitioner noted that regulatory and execution risks can also influence investment thresholds: “In our standard DCF model, we usually adjust for regulatory risk and execution risk specifically.”

Managing risk through cash-flow assumptions and scenario analysis

One of the central questions facing finance teams is whether risk should be reflected through the discount rate or embedded directly into project assumptions. Survey findings suggest that organizations take multiple approaches. Sixty-three percent of respondents evaluate pessimistic scenarios to manage uncertainty, 52% build financial cushions into projections and 48% increase the hurdle rate to reflect risk.

Many practitioners prefer to adjust cash-flow assumptions rather than modify the cost of capital. “It provides greater transparency and flexibility by making the sources of risk explicit rather than embedding them in a single number,” said Scutari.

Scutari added that maintaining a consistent cost of capital helps organizations compare projects more effectively: “Adjusting cash flows allows us to reflect specific risks through scenarios or contingencies and monitor how those risks evolve over time. It also keeps the cost of capital consistent, which improves comparability across projects.”

Others prefer incorporating risk directly into the discount rate. “Risk-adjusted discount rates are easier to incorporate as new product introductions tend to carry larger hurdle rates,” said one finance leader.

And some organizations use a hybrid approach. Another finance leader said, “I prefer building critical, volatile or addressable risks into adjustable model variables for scenarios or Monte Carlo simulations. Steady risks that cannot be influenced are incorporated into the hurdle rate.”

Responding to changes in interest rates

Interest-rate volatility remains one of the most visible drivers of change in capital planning. The survey shows that organizations increasingly incorporate broader macroeconomic factors into their cost of capital calculations. For example, 55% of respondents report factoring geopolitical risk into their estimates, while 51% say they are incorporating real-time data analytics into their calculations.

When rates move significantly, finance teams often reassess key metrics and investment assumptions. One finance leader described the typical process: “We recalculate WACC, reassess ROIC and EVA and test large projects against the revised hurdle rate.”

Others focus on targeted analysis rather than revisiting every financial forecast. “I re-run only the areas where rates truly matter — interest expense, cash flow and liquidity, covenant headroom, WACC or hurdle rates, capital allocation and M&A economics,” said Scutari.

Maisel stated that the response depends on the underlying cause: “It depends on whether the movement reflects short-term shocks or structural changes in markets or geopolitics.”

Traditional models still anchor cost of capital calculations

Despite evolving risks and new analytical tools, most organizations continue to rely on established valuation frameworks. The survey found that 83% of organizations use the capital asset pricing model (CAPM) to estimate the cost of equity, underscoring the continued importance of traditional financial models in capital planning. These models, combined with discounted cash flow analysis and other valuation techniques, remain central to how organizations evaluate major investments and allocate capital.

Interested in learning more? Download the 2026 AFP Cost of Capital Survey Report to see all of the key findings.