What is a ‘Target Return’
A target return is a pricing model that prices a business based on what an investor would want to make from any capital invested in the company. Target return is calculated as the money invested in a venture plus the profit that the investor wants to see in return, adjusted for the time value of money. As a return on investment method, target return pricing requires an investor to work backwards to reach a current price.
Explaining ‘Target Return’
One of the major difficulties in using this pricing method is that an investor must pick both a return that can be reasonably attained, as well as a time period in which the target return can be reached. Picking a high return and a short time period means that the venture has to be much more profitable in the short-run than if the investor expected a lower return over the same period, or the same return over a longer period.
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