Evaluating Performance in Capital Projects: The Initial Return on Investment and Inflation

J U de Villiers

Studies in Economics and Econometrics, 1996, vol. 20, issue 3, 59-78

Abstract: This paper studies the effect of inflation on the return on investment (ROI) required from a project in its first year of operation. This is important because ROI is often used to evaluate the performance of a project once it has been started.The paper shows that inflation has a marked influence on the required initial ROI of projects. The extent of this effect depends upon the type of assets (the ratios of current, depreciable and non-depreciable assets) and the life of depreciable assets employed.The analysis shows that decision makers should, under inflation, require a higher initial ROI from projects employing current assets than from projects employing depreciable or non-depreciable assets. It also shows that they should generally require a higher initial ROI from projects employing short life depreciable assets than from projects employing depreciable assets with a longer life.

Date: 1996
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DOI: 10.1080/03796205.1996.12129101

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