Constructing the return on new operating capital

Start with the operating plan for an identifiable addition of capital and compare it with the operation without that addition. Use the revenue and resource forecast supplied through FIN.4 and MA.5. Deduct attributable operating expenses, including depreciation, and the corresponding operating tax before financing effects to obtain the additional after-tax operating profit. Match it to the preceding addition of net operating capital: net capital expenditure plus added operating working capital. Exclude financing balances and excess cash; treat leases or capitalized development consistently in both capital and profit. Separate profit changes in existing assets from profit attributable to the new investment.

For the one-period steady case, expected new-capital return = the next period’s sustainable incremental after-tax operating profit / the preceding net operating investment that produces it. State when the investment becomes productive and how maintenance preserves the capital and profit afterward. This operating-profit ratio differs from FIN.5’s investor-required return and FIN.6’s return on dated cash flows. An adequate supplied estimate with these definitions and conditions can be used directly.

Support the estimate with the plan’s demand, utilization, prices, resource costs and investment requirements. A historical trend or peer investment can inform those assumptions after aligning capital, profit, tax and timing definitions and explaining why its economics apply to future additions. A high average return on old assets does not establish the return on new ones; competition can reduce prices or utilization. Continuing growth also requires opportunities to repeat the investment on the assumed terms. For multiyear construction or ramp-up, changing existing productivity, or investment that cannot scale as assumed, forecast the dated transition explicitly. When future conditions remain unresolved, carry a conditional value range instead of selecting an unsupported return.