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A previous paper in this journal discussed how to estimate the appropriate rate that should be used to evaluate investment projects. In this paper, the same theme is extended to discuss why projects might attract hurdle rates that are higher than the cost of capital. The answer involves discussion of the topic of real options, which may provide a rigorous explanation of how companies can value flexibility in capital budgeting. This paper discusses the gap between the hurdle rate and the cost of capital and explores possible explanations for the rational use of additional barriers before accepting capital projects.

This paper introduces the ways of estimating the cost of capital. It briefly reviews the main theories of capital structure before explaining how the use of fixed‐interest debt finance might affect the cost of capital. It then considers ways of estimating the cost of equity and finally brings results together. Two final issues are considered: how the cost of capital can be used to appraise projects like the ones the firm is already undertaking; and how it can be used to consider projects that lie outside the normal range of business activities of the firm.

Ronald L. Ward has been named vice‐president—international activities for Howmet Turbine Components Corporation.

IT is fitting that a new series of this magazine should be introduced by some reflections on the whole question of book selection, both for the general public and libraries.

The upwards‐only rent review is a characteristic feature of the institutional property lease in the UK. It has been subject to increased attention by investors and regulators in the 1990s with various proposals which sought to make upwards‐only rent reviews illegal. Applies an arbitrage method based on market pricing which enables consistent valuations of different investment opportunities to be compared in a rigorous yet consistent approach. In this way the value of the upwards‐only option can be assessed. Uses the arbitrage approach to value the difference between a lease in which the rents are reviewed upwards‐only and that in which rents can be reviewed upwards or downwards. Starts by applying the arbitrage approach to a simple lease in which rent may take only two values. This simple approach is well established in the finance literature when analysing options, and the valuation of the upwards‐only lease may be seen as a multi‐option contract.

What do cleaning toilets and police work have in common? They're dirty work? Someone has to do them? And they are both booming markets for service robots. Consider the following:

Complicated leasing terms make both the valuation of lease contracts and the calculation of effective rent levels difficult. These complications are compounded by the existence of option‐like features in many contracts. For example, retail leases in the USA generally have overage rent clauses that allow the landlord additional rent if sales exceed a breakpoint, but set a minimum rent level under any sales conditions. Similarly, upward‐only rent review clauses are common in the UK and Australia (as well as other commonwealth countries). Here the rent is fixed at the commencement of the contract, with the option to review the rental figure in line with market conditions at pre‐determined intervals (normally every five years). If rents in the market have increased over the interim period, the rent of the subject property will be adjusted upwards accordingly and this higher level becomes the minimum possible future rent. However, if market rents have either remained static or decreased, the landlords would choose not to operate the rent review clause and the existing rent will continue. The US overage contract can be valued using a binomial approach. The upward‐only adjusting leases cannot because the value of the option is “path‐dependent”. Here, Monte Carlo valuation methods must be used. In this paper we describe both approaches. We show the relationship between the rents on these contracts relative to those without overage or with up and downward adjustment. The key determinants in establishing this relationship are the expected drift and the volatility of either sales (in the case of overage) or market rents (in the case of upward‐only leases).

On another page we reprint some of the specially library paragraphs from the Fourth Annual Report of the Carnegie Trustees; and we believe that no apology is necessary for bringing them thus separately to all library workers. This beneficent institution is pursuing a policy in regard to our movement which, in its generosity, liberality, and at the same time cautious and wise restraint, must have the warm approval of librarians. It has been realized in a practical fashion that the library movement should not be allowed to stagnate during the war, because the most insistent calls upon the services and resources of libraries are likely to be made very soon after the cessation of hostilities, and if libraries are prepared now to meet those calls there should then be an impetus to the movement that will establish it finally.