Measuring Return On Investments

In chapter 4, we developed a process for estimating costs of equity, debt and capital and presented an argument that the cost of capital is the minimum acceptable hurdle rate. We also argued that a project has to earn a return greater than this hurdle rate to create value to the owners of a business. In this chapter, we turn to the question of how best to measure the return on a project. In doing so, we will attempt to answer the following questions:

• What is a project? In particular, how general is the definition of an investment and what are the different types of investment decisions that firms have to make?

• In measuring the return on a project, should we look at the cash flows generated by the project or at the accounting earnings?

• If the returns on a project are unevenly spread over time, how do we consider (or should we not consider) differences in returns across time?

We will illustrate the basics of investment analysis using three hypothetical projects - an online book ordering service for Bookscape, a new theme park in Thailand for Disney and a plant to manufacture linerboard for Aracruz Cellulose.

Lessons From The Intelligent Investor

Lessons From The Intelligent Investor

If you're like a lot of people watching the recession unfold, you have likely started to look at your finances under a microscope. Perhaps you have started saving the annual savings rate by people has started to recover a bit.

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