Return on Capital

The return on capital on a project measures the returns earned by the firm on it is total investment in the project. Consequently, it is a return to all claimholders in the firm on their collective investment in a project. Defined generally,

Earnings before interest and taxes

Return on Capital (Pre-tax) =-

Average Book Value of Total Investment in Project

Earnings before interest and taxes (1- tax rate)

Return on Capital (After-tax) =-

Average Book Value of Total Investment in Project

To illustrate, consider a 1-year project, with an initial investment of $ 1 million, and earnings before interest and taxes of $300,000. Assume that the project has a salvage value at the end of the year of $800,000, and that the tax rate is 40%. In terms of a time line, the project has the following parameters:

Earnings before interest & taxes = $ 300,000

Salvage Value = $ 800,000

Average Book Value of Assets = $(1,000,000+$800,000)/2 = $ 900,000

The pre-tax and after-tax returns on capital can be estimated as follows:

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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