capitalized on the balance sheet as an asset. Over time, the depreciation expenses on the income statement will reduce the asset value on the balance sheet. In turn, depreciation represents the delayed expensing of the initial cash outflow that purchased the asset, and is thus a rather liberal accounting practice. Relationship with WACC Because financial theory states that the value of an investment is determined by both the amount of and risk of its expected cash flows to an investor, it is worth noting ROIC and its relationship to the weighted average cost of capital (WACC). The cost of capital is the return expected from investors for bearing the risk that the projected cash flows of an investment deviate from expectations. It is said that for investments in which future cash flows are incrementally less certain, rational investors require incrementally higher rates of return as compensation for bearing higher degrees of risk. In corporate finance, WACC is a common measurement of the minimum expected weighted average return of all investors in a company given the riskiness of its future cash flows. Since return on invested capital is said to measure the ability of a firm to generate a return on its capital, and since WACC is said to measure the minimum expected return demanded by the firm's capital providers, the difference between ROIC and WACC is sometimes referred to as a firm's "excess return", or "economic profit". See also Cash flow return on investment (CFROI) Fairfield Plaza, Inc. v. Commissioner Negative return (finance) Profit maximization Profitability Rate of profit Rate of return on a portfolio Recovery of capital doctrine Return on assets (RoA) Return on brand (ROB) Return on capital employed (ROCE) Return on net assets (RoNA) Tendency of the rate of profit to fall References Financial ratios Investment indicators