,
RATES
DUAL
.
THE
*LOO
ENGLTSH
APPROACH
TNTRODUCTTON
Dual. rates are used ,. n the OK Largely to vaLue LeasehoLds. Tt use has been cat, .tici. sed because of the :-
(L) Low si. nki. rig fund rates avai. LabLe, and
(2) need to refLect income tax penal. ties.
However, i. t has been de:Eended as the onLy way that
ephemeraL i. nvestments such as LeasehoLds and extract^. ve
i. ridusbri. es can be compared wi. th aLt. ernati. .ve ,. nvestments
eLsewhere.
TNWOOD
*LLo
V
HOSKOT. ,D
HoskoLd deve1. o0ed the dual. rate method Co overcome
certai. n tribe, :en'b ae:Ei. clerici. es in the :Lnward SLngl. e rate
method.
"The matn probLem was that management normaLLy
evaLuated projects on a si. rigLe rate basis at a rate
whi. ch re^,. ecC. ed al. ,. the JCLsks invoLved and Letnvestmerit at this in. sk rate was not considered to be a
pJ:acti. caL assumpt, .on"
Greaves, 1.980
TRR
*1.20
The Tnwood method ,. s based on the ,. ritei:naL rate o:E
return (i. ICJ:') ;
"Tt. ,. s that rate Wh, .. ch di. SCOuntS a, .L returns to equaL
the ori. gi. na, . i. nvestment. The TRR i, s general. Ly consi. dered to be the result of caLcuLat, .. on rather than
a speci. ^Led or desi. red (gi. ven) rate of return".
- ATREA
This does not deaL with the rei. nvestment probLem :EOJ:
an i. nvestment such as a head lease. For exampLe, i. s i. t
assumed i. n TRR that the i. ncome i, s Letnvested? The answer
LS nO.
Therefore, SI. inPI. e TRR i, s probabLy a good measure
:Eoic ephemeral. investments.
HoskoLd tici. ed to overcome these probLems wi. th the
dual. rate method.
,
2
.
*L3o
HOSKOLD'S METHOD
(L) The i. ncome i. s appoicti. oned between return on
i. nvesbment & repLacement of capi. tal. .
(2) The repLacement o^ capi. ta, _
Lei. nveStment rate (. SLnk, .rig fund rate).
i. s made at the
(3) Some investments showed a h, .gh TRR (eg.
Tt i. s
impJ:acti:cal. to assume that the i. nvesto, : wouLd.
in, .nes ) .
reinvest
at that hi. gh rate.
Under the duaL rate method the sinki. rig :EUnd rate i. s
aLways subst. anti. aLl. y below the return on i. nvestment
(,:eumtinerati. on rate). I;^^9.4 Ite^- ,.,.@!- 6C
For examp, .e, reinunerat. i. on rate: 256
SLnki. rig' fund rate: L5^;
*L40
CALCULATTNG DUAL RATES
ExampLe
Present vaLIle of $LOOO pa, 3 year's at
20!^ paTnWOOdS
(I. +' 2) 3
AMT
PV PMT
L/AMT
PV
O.2
IC
O.2
,:
PV $ LOOO PA
2 . L06
L- 0,5787
O.2
L - PV
2. L06 x LOOO
2L07
HoskoLd
Remuneration rate
2 5 !,
pa.
'. 5!^ ,a'
SLnki. rig fund rate
Cost of i. nvestment say $ 21.00.
For each $LOOO I. ncome; .25x2L00 = $525
475 to replace capi. taL
Leaves 1000-525
RepLacement of capi. .taL;
3N 1.5!^i. 475 PMT CPT E'V
$ L650
Reduce to $L800
There:Eo, :e, $2LOO i, s too much.
550
.
L000 - (. 25 x 1800)
3N L5^;i. 550 PMT CPT FV L91. O
Therefore the pi:'i. ce patd wi. t. h the BOSkoLd method i, s
between $1,800 and $L900.
Sin Le Rate
(L)
1.0 0 O
20^; x 21.07
42L. 4
= 42L. 4
578.6 pa.
(2) 3N 20!^i. 578.6 PMT CPT E'V 2L06
The ILL' method assumes that the cap, .ta, . i. s Locked up
i. n the i. nvestment. .
3
.
*
EXAMPLE OF THE TRR APPROACH
*L50
Suppose $2487 i, s placed i. n a bank deposit.
Year I.
Capi. taL
Tncome
Outstand. i. n
L
2
3
Trite rest
Capital.
I. 0 ^
w^. thd, cawn
L735
LOOO
LOOO
249
L74
751.
826
909
LOOO
91.
909
2487
2486 .
The capital. wi. thdJ:awn i. s capi. tai. back i. n hand.
The bank onLy pays triterest on the money i. n the account
(at 1.0^;) .
SLngLe rate wh^. ch assumes rei. nvestinent at 6^ can hardLy
be compared wi. th si. rigLe rate' assruni. rig rei. nvestment. at 206.
There^ore the advantage of dual_ rates is that both can be
compared at the same rate of investment.
HOSKOl. ,D' S SOLDTTON
*L60
Hoskol. d's SOLuti. .on was to i. .nticoduce the SLnki. rig :EUnd
rate (SE'R) as opposed to 1:1:'J:.
"The SER has meani. rig onLy as a return each year on total.
outLay and not on capi. tal. outstanding and i, s thus different
J. n
*L7o
concept ^, coin the i. JCL. .
Greaves, L980 .
MODERN THOUGHT
TRUE RATE OF RE:TURN (. 11'RR)
TRR i. s based on a practi. .caL Tetnvestment rate.
RELNVESTllENT PROBLEM
The TRR method assumes Chat bhe whoLe cash :ELow (not
onLy the replacement of capi. taL) i. s rei. nvested at the SER.