Examples of target return vary depending on context, but in investing terms it often refers to the expected annualized return that an investor aims to achieve from a particular asset or portfolio. For example, an investor might target an annual return of 10% on their stock investments over a five-year period. This target return guides their investment decisions, risk tolerance and portfolio allocation strategies to align with achieving their financial goals.
An example of a target rate of return could be a retirement fund setting the goal of achieving an annualized return of 7% over a 20-year horizon to meet its future obligations. This target rate of return reflects the fund’s investment strategy, asset allocation and risk management approach aimed at generating sufficient growth to fund future pension liabilities while managing risk and market volatility .
Target pricing is illustrated when a company sets a specific price for a product or service based on market analysis, cost considerations, and desired profit margins. For example, a technology company could introduce a new smartphone model and set a target price of $799 to effectively compete in the market while covering production costs and achieving a targeted profit margin. Target pricing strategies involve careful analysis of market demand, competitor prices and cost structures to optimize profitability and market positioning.
Calculating the target rate of return involves several steps depending on the context. In investment scenarios, this typically involves estimating future cash flows, discounting them to their current value using an appropriate discount rate (which represents the required rate of return), and determining the value net present value (NPV) or internal rate of return (IRR) (IRR). For commercial projects, calculating the target rate of return takes into account the initial investment, expected future cash flows, and the required rate of return to determine whether the project is financially viable.
Target return on sales measures a company’s profitability relative to its revenue. It is calculated by dividing net income (after taxes and other expenses) by the total sales revenue generated over a specific period, expressed as a percentage. For example, if a company’s net income is $500,000 and its total revenue is $2,500,000 for the year, the target sales return would be 20% ($500,000 / 2 $500,000 * 100). This metric helps companies evaluate their operational efficiency, profitability margins and financial health in relation to their business performance.