Should your company build a new factory? Make a big acquisition? Sell off a division? Like most senior managers, you rely, quite appropriately, on projections of future cashflows to drive such important strategic decisions. These projections, in turn, are often based on the elements of cashflow—such as investment and operating costs—that are relatively easy to forecast (see Exhibit 1). This holds true even in industries such as electronics where costs are very much in flux. But the usefulness of such projections is often limited by their failure to think deeply about the one element of future cashflows that has the greatest overall impact on projected investment returns: price.

Although price forecasts are critical to major strategic decisions, few CEOs are truly comfortable making them. Many rely on hopeful assumptions about future prices, sometimes made in constant and sometimes in current dollars, without recognizing what effect their assumptions have on projected investment returns. Often they decide to keep things even simpler by assuming, implicitly, that future prices will stay where they are today, or that historical price trends will continue.

Such assumptions can produce estimated rates of return that are...