NORMAL RATE OF RETURN :

Normal rate of return is the rate of return that the investors in general expect on their investments in a particular industry. This rate differs from industry to industry. The normal rate of return is required to be adjusted in the light of certain circumstances, i.e.

(i) Risk attached to the investment: If a business is having more risk the rate of return should also be more. Risk may be due to high borrowings or by the nature of business.

(ii) Period of investment: The longer the period of investment, the higher is the rate of return.

(iii) Higher bank rate: An increase in bank rate gives higher expectations to the investors.

(iv) Boom period: When there is a boom in the industry, the investors have higher expectations and the normal rate of return is to be increased.