When a required rate of return on investment is established, this does not merely reflect the cost of the capital used but also includes a risk factor reflecting the uncertainty of earnings during the whole period that the investment is expected to provide earnings. It also includes a factor representing administrative bother in getting into the project. Thus, while the cost of borrowing money may be 8 to 10%, the required rate of return may be 15 to 20%. Another pertinent fact is that a dollar available now is worth more than a dollar received next year, on the basis that we can do something with the dollar to earn income when we have it. Thus, any analysis of profitability must consider the time-interest rate relationships. The presentworth method, and similar methods such as discounted cash flow, permit the comparison of various alternatives over varying life spans and with different rates of annual return. There will always be some assumptions, as in the case of salvage value and obsolescence, but an evaluation method which considers the time relationships and interest is greatly preferred over linear accounting methods. The same type of analysis can be used in assessing the desirability of upgrading materials in corrosive service.

  • Corporate Authors:

    Southam Business Publications Limited

    1450 Don Mills Road
    Don Mills, ONo,   Canada 
  • Authors:
    • PALMER, J D
  • Publication Date: 1969-7

Media Info

Subject/Index Terms

Filing Info

  • Accession Number: 00005909
  • Record Type: Publication
  • Source Agency: Engineering Index
  • Files: TRIS
  • Created Date: Nov 25 1974 12:00AM