The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success

by William N. Thorndike Jr.

You’ve decided your personal hurdle rate: you will go forward only if the project can produce at least a 20 percent return. You make the following calculations: a new oven costs $50,000; additional space in your existing building costs $50,000 to build out and would likely produce incremental annual profits of $20,000 after labor, material, and other operating costs. So, you have $100,000 in up-front costs (the oven plus the build-out) and an expected annual profit of $20,000, for an expected return of 20 percent—right at your hurdle rate. You then turn your attention to the new-store option. The upfront costs include an oven at a cost of $50,000 and $150,000 in build-out expenses. The scenarios for the new store are harder to predict (it’s in a different part of town, and so on), but you assess the potential annual profit at $50,000–$75,000. So you calculate that you would spend $200,000 up front, and you would expect a return of 25–37.5 percent. This return, even at the lower end of the range, is clearly higher than the adjacent-space option; but before deciding which path to take, you ask yourself some important, qualitative questions: • The new store is in a different part of town, and there is greater risk that sales will be different than what you forecast—how comfortable are you with your estimates? • Is the higher return enough to compensate for this additional uncertainty? • The new store requires twice the investment of the expansion option. Can you raise the ext...