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231 comments on Monday Open Thread/Which Battle Plan Would You Draw?

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Jack on March 6, 2006 - 1:22pm Permalink | Subthread | Parent | Comments top
Joule writes: "It's also become almost an article of theology among financial and business types that a unless a certain percent return on investment is guaranteed, there is no justification for going with a project."

Not exactly, projects or investments are evaluated based on a hurdle rate and not judged acceptable unless the expected return is higher than the cost of capital. Your comment about a guarantee is overstated as is calling ot theology. But you are right that the private sector requires that their money earn more in any given investment than they would get in the next best option. If oil is subsidized by military spending, it skews this decsision.

What would you suggest as an alternative?  There are a limited number of possibilities:

  1. Investors agree to lose money - which is highly unlikely

  2. Governments (or other bodies) agree to subsized certain investments - which is difficult and subject to political influence. None-the-less, it is the logical way to include the externalities you mention above ("what if we were to take say 25%...") in allocating investments in alternatives.

So how would you see these subsidies determined? Would this favor coal and nuclear energy - or would you also make adjustments for climate impacts? Who would decide all of this?

I agree with your fundamental point - oil is subsidized by miltary spending, which makes all alternatives more expensive than they should be. I would just be curious to see more details on how we can move to mitigate ths problem.

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TJ on March 6, 2006 - 1:33pm Permalink | Subthread | Parent | Comments top
For a large corporation the cost of capital should only be what, 8-10%?  The floor now for projects is more around 15-20% ROI, AFAIK.  But I see no way on earth for corporate executives to be satisfied with 10% ROI when they've tasted 25%.
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Jack on March 6, 2006 - 2:08pm Permalink | Subthread | Parent | Comments top
The cost of capital depends on the specific project/investment, not the investor/corporation.

However, if a corporation can realize returns of anything above their cost of capital they should be able to raise this from the market. Companies with access to returns above their cost of capital should not be capital constrained and hence can invest not only in the projects that return 25%, but those that return 24%, 23%, 22%, etc.

However, I dispute this statement "The floor now for projects is more around 15-20% ROI". No one in the world has access to a steady stream of projects with an expected return of 15 - 20% unless they are very risky.

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joule on March 6, 2006 - 1:48pm Permalink | Subthread | Parent | Comments top
I was just pointing out what I perceive to be a problem in the way we evaluate alternative energy in relation to fossil fuel energy.  I don't presume to be smart enough to know what the solution is:-)
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ET on March 6, 2006 - 2:57pm Permalink | Subthread | Parent | Comments top
At some point in an individual's thinking on the cost/benefit ratio of alternative energy systems, and, at some point in the whole industry's thinking, the question will change from (for example): what is the cost in $/kwh for on grid electricity vs PV electricity, to: what is the cost of no electricity vs the cost of PV electricity.
Many individuals have reached this point. I think the industry as a whole is pretty far from this point.
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vtpeaknik on March 6, 2006 - 2:32pm Permalink | Subthread | Parent | Comments top
"The cost of capital" is basically defined as the interest you'd pay to borrow it.  I.e., the opportunity cost, since, it is assumed, you can put that money into some other investment and make some percentage gain.

This theology is the heart of our problem: the debt-and-interest financial system that requires endless "growth" to survive.  Without a new paradigm we're doomed.

Those investors that refuse to "lose money" now will lose everything later.  Sort of like the claim that reducing GHG is "bad for the economy".  Tell that to NOLA.

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ryanluke on March 7, 2006 - 2:55pm Permalink | Subthread | Parent | Comments top
This theology is the heart of our problem: the debt-and-interest financial system that requires endless "growth" to survive.  Without a new paradigm we're doomed.

Here's the link to a paper I wrote in an attempt to outline the paradigm of an organic economic system. An organic economy is an economy that does not require perpetual growth (an impossibility on a finite earth) , but balances the forces of growth and decline.

The Organic Economy

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231 comments on Monday Open Thread/Which Battle Plan Would You Draw?

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