Before the start of implementation of any investment project is necessary to make all the necessary calculations.Perhaps the most important of these are indicators of the calculations that determine the economic efficiency of investment.Based on these figures, the investor can judge both the feasibility of the project in general, and about the prospects for participation.
One of the most important indicators that can count, probably, everyone who has any relation to investments, can be called net present value.The various thematic literature you can find this name as the net present value, which is, in fact, the word for word translation from the English.But most often used is the English abbreviation - NPV.The principle of the calculation of the index consists of a comparison between the discounted amount invested in the investment project and the amount of the discounted profits.A comparison is to reduce the amount of return on investment, ie income "cleansed."
You may ask: "Why is discounted value indicators?" The answer is that the money is today, without a doubt, are more valuable than tomorrow.Such a phenomenon is determined by three factors: inflation, the risk of non-receipt of funds in the future and the loss of profits from the use of money in alternative ways.Thus, discounting income allows to take into account in the calculation of the effect of the time factor.
Naturally, net present value has a certain efficiency criteria.The value of NPV must be non-negative.A positive value indicates that the project can be considered effective and a value of zero can match the effectiveness of projects, if you intend to receive any positive effects besides the economic.
most important issue in determining the net present value to the present day is the choice of an indicator of discounting.The fact that, according to the expert, at the same cash flows can receive both positive and negative net present value.It becomes quite clear that this figure is subjective.
objective indicator is the level of the internal rate of return, since it does not depend on the opinion of the person conducting the calculations.The meaning of this indicator is that it is the inherent value of the project discount rate at which NPV becomes zero.That is, the maximum income, which in principle can generate the project.It is important to compare the level of the price index of capital employed.Obviously, this price should be less than the internal rate of return.
Using net present value can be calculated another performance indicator - an index of profitability.It specifies how many units of profit brings each currency, whether the ruble, dollar or something else invested in investment.Based on this definition, the index of profitability can be determined by the discounted earnings ratio to the amount of discounted investment.You can make elementary transformations that will calculate this figure as follows: you will need to divide the value found in the NPV discounted investment and increase output per unit.It should be noted that this indicator shows the rate of return for the entire period of implementation, so using it is not quite correct to compare projects of different duration.
calculation of the above parameters is necessary if you want to judge the effectiveness of the investment project analyzed, but they will not be enough.In any case, it is important to understand that the decision is necessary to calculate system performance, since only in this case it will be possible to draw correct conclusions.
