Which metric would you choose to evaluate a deal by considering the cost basis and resulting yield?

Which metric would you choose to evaluate a deal by considering the cost basis and resulting yield?

• A. Yield-on-Cost
• B. Net present value
• C. Internal rate of return
• D. Equity multiple

Answer: (A)

You’re looking for a measure that ties the total money you’ve invested in a project to the return that investment will produce. Yield-on-cost does exactly that: it uses the total cost basis (purchase price plus capex or improvements) and the expected stabilized cash flow (often NOI) to compute the yield on every dollar invested once the project reaches stabilized operations. This gives a clear picture of how valuable the entire investment will be, not just the initial price or later cash flows. For example, if a deal requires $10 million total investment and is expected to generate $1 million in stabilized annual cash flow, the yield-on-cost is 10%. This is especially helpful in value-add scenarios where the cost basis climbs with renovations; YoC shows whether the added investment is justified by the eventual yield. Net present value and internal rate of return focus on time value of money and the timing of cash flows, which can obscure the straightforward relationship between total capital invested and the eventual yield on that capital. Equity multiple looks at total cash returned relative to equity but ignores the timing of those returns, so it doesn’t directly show yield on the full invested basis. Yield-on-cost directly captures the connection between what you’ve spent and the yield that spending supports, making it the most appropriate choice here.

You’re looking for a measure that ties the total money you’ve invested in a project to the return that investment will produce. Yield-on-cost does exactly that: it uses the total cost basis (purchase price plus capex or improvements) and the expected stabilized cash flow (often NOI) to compute the yield on every dollar invested once the project reaches stabilized operations. This gives a clear picture of how valuable the entire investment will be, not just the initial price or later cash flows.

For example, if a deal requires $10 million total investment and is expected to generate $1 million in stabilized annual cash flow, the yield-on-cost is 10%. This is especially helpful in value-add scenarios where the cost basis climbs with renovations; YoC shows whether the added investment is justified by the eventual yield.

Net present value and internal rate of return focus on time value of money and the timing of cash flows, which can obscure the straightforward relationship between total capital invested and the eventual yield on that capital. Equity multiple looks at total cash returned relative to equity but ignores the timing of those returns, so it doesn’t directly show yield on the full invested basis. Yield-on-cost directly captures the connection between what you’ve spent and the yield that spending supports, making it the most appropriate choice here.