Abstract
Business planners have become increasingly aware of the need to take into account both the return on capital investment and the cost of capital. However, establishing appropriate rate of return targets is not a simple task. In particular, diversified firms must recognize the differing risk characteristics of their business units and employ different hurdle rates when allocating capital. Failure to account for differences in risk can lead to overinvestment in highly speculative projects and, as a likely outcome, substandard return on investment. This, in turn, will ultimately diminish the market value of the firm.
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