Money makes money.This statement is the key description of the modern economic model.In fact, it can be called correct, but for the money to work and make a profit, is not enough just to have them.It should also be able to spend sometimes quite complex calculations and to choose only those projects in which the money invested will yield the necessary return.
guaranteed return can not be, and therefore there is a need to analyze the profitability of the project, before risk own funds.The process of investment like playing in a casino, but unlike gambling, here the player has a positive expectation.That's the value of this expectation and determines the attractiveness of the project in the eyes of investors
With regard to profitability, the figure represents the ratio of expected profits to the value of your investment.Thus, it is calculated using a simple math - the division, but both the numerator and denominator of this fraction, to determine not so simple.The fact that the profitability of the project is not based on the usual numbers, and the discounted values, reflecting the theory of the time value of money.
This theory is based on the assumption that $ 100 today is worth more than the same money tomorrow.This is absurd, at first glance, the statement makes sense, if you remember about inflation and loss of profits.That is, the investor could have on their hands the means to put in the bank and pick them up after a while, so the calculation of the profitability of the project is carried out taking into account this fact.
For the calculation of the numerator, which shall include the estimated income, you must add up all the recoverable amount over the life of the project, previously discounted.Term of the project can be known in advance, but if it is not defined, it is assumed in the calculations take into account not more than ten years, or the period for which the revenues can be predicted with reasonable accuracy.
need for discounting the expected income divided by the discount factor, built in such a degree, how many years have passed since the investment.The coefficient is calculated as one plus the average bank rate existing at the time of investment, divided by one hundred.
calculate all possible income, you can start spending.At the same time, note that in order to reliably determine the profitability of an investment project, should take into account all the investments in the project over the entire period of existence, not just the initial investment.These same additional investment do not forget to discount, likewise, have been discounted revenues.
Also, do not be amiss to take into account all perceived risks.These include possible fines, property damage, etc.Calculate the loss and multiply by the factor that determines the probability of a risk event.The resulting amount must also be added to the denominator.
Now, finally, we can identify and profitability of the project itself.If it is greater than one, then the project will be profitable for the investor, if less - hopeless.When comparing the different projects in a better position to be the one with the indicator of profitability will be higher.
Now you know how to calculate the profitability of the project, and know how to use this indicator for investment decisions.But do not forget that decision-making is also affected by a number of other indicators, not necessarily invest in the project because of its profitability will be higher.
