Expected rate of return

Calculate the expected rate of return for a plant that has a present value of — 18,000,000 at startup. The proceeds are expected to be ... 

The levelized PV electricity and H2 prices presented in this study are derived from Eq. 6 by choosing the electricity or H2 price level for the revenue component that produces a zero net present value for the net cash flow streams over the invest ment period, which in this case is equivalent to the internal rate of return. The esti mation of levelized PV electricity and H2 prices by the net present value cash flow method insures that all creditors and shareholders receive their expected rates of return. 

NPW is the present value of all investments and cash flows during the project lifetime. This takes into account time value of money at the expected rate of return (i year ). The expected rate of return, usually termed as the discount rate, is taken as 0.12 year NPW for the WO process is ... 

Can we predict these costs beforehand If a conrpany is considering committing capital to a new project, then in order to determine if that capital investment would be a vise one, that is, one that would meet expected rates of return and would be superior to placing the capital in other investments or projects, modeling of the new process must be done to calculate the expected costs of production. This modeling must begin with kinetics. 

Unless the social rate of return drops precipitously when the expected private rate of return falls from 10 or 12 percent to (say) 5 or 6 percent, this result seems to indicate that there may be many projects where the expected rate of return was a bit lower than for these 5 projects (with the result that they were not carried out), but where the social rate of return would have been quite high. Among the Innovations for which we have data, there is no significant correlation between an innovation s expected private rate of return and its social rate of return. Thus, unless there is a sharp discontinuity in the slope of whatever relationship exists between the expected private rate of return and the social rate of return, no evidence exists to suggest a precipitous drop in the social rate of return when the expected private rate of return falls from 10 to 12 percent to 5 or 6 percent. These results, like those discussed above, may point toward some under-investment in civili2m technology. 

Both differ in the interest rate used for discounting and the definition of the expected return. In case of the NPV the expected rate of return is used whereby the ROV utilizes the risk-tree rate of return. I.e. the decisions are independent from demand fluctuations by utilizing expectations. 

The local expectations hypothesis states that all bonds will generate the same expected rate of return if held for a small term. It is expressed formally in (3.39). 

This version of the hypothesis is the only one that permits no arbitrage, because the expected rates of return on all bonds are equal to the risk-free interest rate. For this reason, the local expectations hypothesis is sometimes referred to as the risk-neutral expectations hypothesis. 

The two machines have different values of initial cost and different values of aimual cost (yearly operating and maintenance costs) as indicated in Table 13.1. If each machine has an expected life of 8 years with zero salvage value and the expected rate of return (/) is 10%, then the annual cost associated with the investment (i ) will be as indicated in Table 13.1 as computed from Eq. (13.5). The total annual cost (investment plus operating cost) is seen to be least for machine P, which is the most attractive one to purchase provided all items of importance have been considered. 

Table 13.1. Comparison of Total Annual Cost of Two Machines (a and P) with the Same Expected Life, Expected Rate of Return on the Investment, and with Zero Salvage Value...

Keywords economic model, shareholder s profit, project cashflow, gross revenue, discounted cashflow, opex, capex, technical cost, tax, royalty, oil price, marker crude, capital allowance, discount rate, profitability indicators, net present value, rate of return, screening, ranking, expected monetary value, exploration decision making. 

Numerical Measures of Risk Without risk and the reward for successfully accepting risk, there would be no business activity. In estimating the probabilities of attaining various levels of net present value (NPV) and discounted-cash-flow rate of return (DCFRR), there was a spread in the possible values of (NPV) and (DCFRR). A number of methods have been suggested for assessing risks and rewards to be expected from projects. 

The same questions may then be asked for different values of the probabilities p and po. The answers to these questions can give an indication of the importance to the company of P at various levels of risk and are used to plot the utility curve in Fig. 9-25. Positive values are the amounts of money that the company would accept in order to forgo participation. Negative values are the amounts the company woiild pay in order to avoid participation. Only when the utihty value and the expected value (i.e., the straight line in Fig. 9-25) are the same can net present value (NPV) and discounted-cash-flow rate of return (DCFRR) be justified as investment criteria. 

Once the economic analysis has been completed, the project should be analyzed for unexpected as well as expected impacts on the economics. This is usually done through a set of what if calculations that test the project s sensitivity to missed estimates and changing economic environment. As a minimum, the DCF rate of return should be calculated for 10% variations in capital, operating expenses, and sales volume and priee. 

Both methods assume that the money earned can be reinvested at the nominal interest rate. Suppose the rates of return calculated are after tax returns and the company is generally earning a 5% or 6% return on investment. Is it reasonable to expect that all profits can be reinvested at 23% or even 20% No, it isn t Yet this is what is assumed in the Rate of Return method. Sometimes the rate of return may be as high as 50%, while a reasonable interest rate is less than 15%. Therefore if a reasonable value for the interest rate has been chosen (this is discussed later in this chapter) and the two methods differ, the results indicated by the Net Present Value method should be accepted. 

A stock that sells for 84 has annual dividends of 2.80. It is expected that the value of the stock and the amount of the dividend will increase 5% per year. Calculate the rate of return paid by the company for issuing stock. 

Most chemical companies aim at making about a 10% profit on all sales. This means that the pretax profits must be around 20%. Since new products involve a large amount of risk and cost uncertainty, a new process is generally not considered unless at least 30% average profit is expected before paying federal corporate income taxes. From this a reasonable rate of return or interest rate may be obtained if some other information on the plants is available. This is done in the following example. 

Suppose that an investment of 100,000 will earn after-tax profits of 10,000 per year over 20 years. Due to uncertainties in forecasting, however, the projected after-tax profits may be in error by 20 percent. Discuss how you would determine the sensitivity of the rate of return to an error of this type. Would you expect the rate of return to increase by 20 percent of its computed value for a 20-percent increase in annual after-tax profits (i.e., to 12,000) ... 

Canada, not in terms of increased life expectancy, but in terms of dollars. We find, as have previous studies, that pharmaceutical spending is a worthwhile investment with high rates of return, and that to restrict access to new pharmacological treatment would deny the next generation valuable increases in health outcomes. 

However, the evidence relating pharmaceutical spending and health outcomes seems overwhelming. International studies, national studies, and disease-specific analyses indicate that pharmaceutical products have been a worthwhile investment over the last half century. With rates of return exceeding 10 to 1 based on measures of increased life expectancy alone, pharmaceutical products have successfully improved health outcomes in developed countries at a cost dwarfed by the value of increased longevity. 

In Chapter 12 Cremieux and his coauthors, based on a systematic review of the empirical evidence, conclude that international and country-specific studies as well as analyses of individual diseases all indicate that, since about 1950, the period covered by their review, investments in pharmaceutical products have generally been worthwhile investments. With rates of return over 10 to 1 based on measures of increased life expectancy alone, not even considering improved quality of life, pharmaceutical research has successfully provided developed countries with better health at a cost that has been far exceeded by the value of improved longevity. Not considering the value of improvements in quality of life, such as from reductions in pain, emotional health, and symptoms from short-term illnesses, should lead to a substantial underestimate of the value of health. 

The pre tax rate of return is expected to be 7% - see regulations December 20th 2002 httn //www.den.no/archive/oedvedlegg/01/02/denar055.pdf... 

If your preferred strategy includes spending capital, a plan for judicious spending will allow you to supplement other income to provide an enjoyable retirement. You must work with a couple of unknowns—how long you will need income and what future rate of return you can expect—but sufficient data help you make educated guesses on these. Consider the following table. 

Discounted cashflow rate of return (DCFRR). This method is called the investors return on investment, internal rate of return, profitability index, interest rate of return, or discounted cashflow. A trial-and-error solution is necessary to calculate the average rate of interest earned on the company s outstanding investment in the project. It can also be considered the maximum interest rate at which funds could be borrowed for investment in the project, with the project breaking even at the end of its expected life. 

The same approach used in the sinking-fund method may be applied by analyzing depreciation on the basis of reduction with time of future profits obtainable with a property. When this is done, it is necessary to use an interest rate equivalent to the annual rate of return expected from the use of the property. This method is known as the present-worth method and gives results similar to those obtained with the conventional sinking-fund approach. The sinking-fund and the present-worth methods are seldom used for depreciation cost accounting but are occasionally applied for purposes of comparing alternative investments. 

Methods for including the cost of capital in economic analyses have been discussed in Chap. 7. Although the management and stockholders of each company must establish the company s characteristic cost of capital, the simplest approach is to assume that investment of capital is made at a hypothetical cost or rate of return equivalent to the total profit or rate of return over the full expected life of the particular project. This method has the advantage of putting the profitability analysis of all alternative investments on an equal basis, thereby permitting a clear comparison of risk factors. This method is particularly useful for preliminary estimates, but it may need to be refined further to take care of income-tax effects for final evaluation. 

For this study it is assumed that the effect of inflation will be the same for cash inflows and outflows and rates of return. This inflation assumption implies that the inflation factor in Eq. 2 is the same in both the numerator and denominator, and hence, cancels out. Therefore, the net present value is both a nominal and real value. However, if the expected inflation rate for cash inflows, cash outflows, or rates of return are different, then inflation factors need to be added to the appropriate factors in Eq. 2 or equivalently in Eq. 6. 

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