Businesses Operate to Make Profit
Businesses vary extraordinarily in the breadth and scope of products and services they offer, yet at the core of every business, is the goal to make money. For every new project a company takes on, the potential profit that they expect to generate, or the return on the investment, is a deciding factor in whether the project will ever get off the ground. Taking on a project which requires large amounts of capital that only stands to bring in as much or less money than the expenditure will not be pursued.
Alternative Investment Returns are a Barometer of a Project's Viability
Calculating the expected returns on a given project involves complicated cost-benefit analyzes that usually involves the opportunity cost of allocating funds to a new project. Since spare capital can be used to invest in stocks, bonds or earn interest in savings accounts, it is not always adequate that a potential project be profitable. It must be profitable enough to merits creation. That is, if a company can safely save money with a guaranteed return on investment of 5 percent, it is not likely to attempt a risky new project that it predicts will yield a return of 4 percent.
In this way, standard investments serve as a gauge of how viable a given project is. Since any new project carries some inherent risk of failure, the possible return on investment must usually exceed the returns of reliable alternative investments by a sizable margin.
Time is Often a Large Hurdle for New Projects
One of the most important factors when considering the viability of a project and return on an investment is time. New projects and start-up businesses take time to establish, and capital spent developing them is spent up front with the goal of making it up later. It often takes more than a year for a project to be solidly established, and longer for it to start bringing in a profit. If the capital where immediately put into a normal investment, like the stock market, it would start earning profit and compounding immediately. This means the new project has to make up for the time it is not profitable, by making higher returns in the future. The longer the project takes to become profitable, the more difficult it will be for it to overcome the the lost returns that could have been gained had the start-up capital been accruing interest in another investment.
