A Profitability Criterion for Measurement and Decision-Making

Abstract

Consideration of the legal structure of corporations, and of long-term price and dividend trends of industrial stocks, leads to the conclusion that a corporation achieves its maximum profitability when the discounted value of the over-all flow of cash associated with its various activities is a maximum. The appropriate discount rate is somewhere near 6 per cent. Since each project, individually, must have its maximum possible discounted value, the profitability criterion serves as a criterion for decision-making.