Friday, October 05, 2007

Columbus Accounting

Monday, October 8th is set aside to commemorate the arrival of Columbus and Company in the Western hemisphere. Everyone now seems willing to overlook the fact that he actually thought he was somewhere entirely different.

Back in the throne room, Queen Isabella and King Ferdinand may have had some second thoughts about their investment. What would be their Return on Investment?

What was the investment? History books are sketchy on the details. W.G. Sumner did a seminal study in 1903, which reached a cost figure of $732,260 in U.S. dollar terms. An accounting professor at the University of Houston, David Satava, published an article in 2005, suggesting that Sumner was on the right track but left out some crucial expenses - a lifetime annuity awarded to the first person to spot land in the new world, the bonus given to Columbus upon his return and the loss of the Santa Maria (it sunk!).

What value would an analyst place on the return? That is a matter open to discussion. Was Isabella forward thinking enough to discount back fifty years or one hundred years? In hindsight, of course, we all realize the implications of Columbus voyage went well beyond the spices, gold and land the Spanish had in their plan.

There is a lesson here in evaluating the value of strategic acquisitions, since an altered competitive position is often not initially apparent. Yet the impact on future revenue and profit margins changes return on investment.

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