Call it investment limbo. After nearly three years of historically low interest rates, it's the rare company investment strategist who isn't puzzling over his or her next move. With interest rates near 40-year lows, some projects whose returns couldn't have matched the cost of capital just a few years ago now have allure. But if stronger economic growth pushes interest rates up, those projects could spill red ink. Similarly, planners must consider the chance that projects with lower returns on invested capital (ROIC) than they've become accustomed to might pay off—but would lower a company's average return.

In our experience, companies need to be aware of the temptations and traps that lurk in this environment. With signs of economic recovery becoming more widespread, it will take close analysis to determine if today's marginal projects will become tomorrow's winning growth plays—or if a turnaround in interest rates will threaten their value altogether. The smartest response, we believe, includes an objective look at real investment costs and a thorough reexamination of what constitutes realistic returns. Only then can companies confidently assess investment options and pursue growth strategies rather than sit passively on the sidelines while competitors capture the best available investment...