Identifying appropriate Project Required Return

Abstract

Most of the models for identifying required returns are based on the past performance of profitability, company share prices and market returns. The future expectations seldom get incorporated therein. Govt. expectations are based on different considerations altogether. Lenders also view this aspect differently. Infrastructure projects carried out with or without forming special purpose company pose another set of issues.

Practitioners follow different methods & considerations for identifying project required return. These are WACC, CAPM, Risk Adjusted Discount rate, Gordon model, Asset Beta, industry averages, opportunity costs, strategic considerations etc. For a given cost and future projections of project a small upward or downward change in the project required return can make the project financially unattractive or attractive. This is a very grey area of project appraisal.

The purpose of this article is to examine the spectrum of issues involved around deciding the hurdle ‘project required return’ and bring out comprehensive view on the same