Evaluating the effectiveness of investment projects - notes

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on the level of profitability of the company affects how quickly and correctly the entrepreneur is able to make decisions regarding the investment of free cash flow.That is why it is so important assessment of the effectiveness of investment projects.It aims to identify potential risks on them, as well as to predict the potential magnitude of profits associated with the sale.

Therefore, assessment of the economic efficiency of the investment project involves the use of statistical methods that take into account the time factor that is crucial for the investor.In order to map the future level of income for the project and the necessary investment now, using a mathematical method of discounting.Evaluating the effectiveness of the investment project takes into account the factors that lead to the devaluation of money.The analysis calculated the potential effect of changes in commodity prices, the increase or decrease in sales volume and market demand for the products, as well as costs associated with product sales.

In connection with this assessment of the effectiveness of investment projects takes into account four main factors, the calculation that allows to take a positive or negative decision in a particular case.These factors include the following: Net income (NPV), the yield and efficiency (PI), the internal rate of return of the project (IRR) and the payback period (PP).

Thus, evaluation of the effectiveness of investment projects begins with the calculation of the integral indicator of the level of net income, which is the difference between the future income from the project, discounted at the time factor and the required initial revenues.If this figure is less than zero, the further consideration of the investment does not make sense.Further evaluation of the effectiveness of investment projects requires the calculation of the efficiency of use of material resources and rates of return, which is the quotient of discounted future earnings and initial investment.If the index is less than one, then the project will never pay for itself not, so you better not be taken for its implementation.

more complete analysis of the needs of calculating the rate of return and payback time of the project.Internal Rate of return - it is nothing like the discount rate at which the value of net income changes its sign from plus to minus, ie,the project becomes profitable for the investor.

If IRR greater current deposit rate, or rate of return on alternative financial transaction, such a project must necessarily be accepted if its payback period is acceptable for the investor.This last condition is a key period in the calculation of return on investment.Generally, PI should be less than the time for this loan repayment amount.If you invest your own money, you first need to consider at what time you are ready to put them into circulation, that is,when they need you again.