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One can determine the minimum return on an investment, often called a hurdle rate, by first determining the initial cash outlay which includes costs such as equipment, shipping, installation, start-up, and training. Then, forecast the cash flows from the investment, allowing for variables like increased working capital, changes in taxes, and adjustments for non-cash expenses. Companies may have different hurdle rates depending on the risk involved in proposed investments.
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Need help with which companies or projects to invest in? As a key driver of value in business, ROIC measures how well the company deploys its capital....
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Determine the initial cash outlay – this includes items such as equipment costs, shipping costs, installation costs, start-up costs, training for the people involved, etc. "Everything that goes into getting the project up and running has to be part of your initial cash outlays. If you're just buying a new machine, it's pretty easy to estimate all the costs. A project or initiative that is likely to take several months will be harder," Knight says. Forecast the cash flows from the investment – here, you need to estimate the net cash the investment will bring, allowing for variables like increased working capital, changes in taxes and adjustments for non-cash expenses. Putting the cash flows on a calendar will aid your estimation of returns year by year or even month by month. Determine the minimum return – the minimum rate of return is often called a "hurdle rate." Companies may have more than one hurdle rate depending on the risk involved in proposed investments. Knight says: "The fina...
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