Evaluation of the effectiveness of investment projects - important points

The level of profitability of the enterprise is affected by how quickly and correctly an entrepreneur is able to make decisions regarding the investment of free cash. That is why it is so important to evaluate the effectiveness of investment projects. It is aimed at identifying possible risks for them, as well as forecasting the potential amount of profit associated with the sale.

Therefore, the assessment of the economic efficiency of the investment project involves the use of statistical methods that take into account the time factor, which is decisive for the investor. In order to compare the future level of income for the project and the investments necessary today, use the mathematical method of discounting. Evaluation of the effectiveness of the investment project takes into account the factors that lead to the depreciation of money. The analysis calculates the possible effect of changes in prices for goods, increase or decrease in sales and market demand for goods, as well as costs associated with the sale of products.

In this regard, the evaluation of the effectiveness of investment projects takes into account four main factors, the calculation of which allows you to make a positive or negative decision in this or that case. These factors include: net profit (NPV), profitability and efficiency (PI), internal project profitability (IRR) and its payback period (PP).

Thus, the 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 in future project revenues discounted for the temporary factor and the necessary initial income. If this indicator is less than zero, then further consideration of such an investment does not make sense. Further, the evaluation of the effectiveness of investment projects requires the calculation of the efficiency of the use of tangible assets and the rate of return, which is a private discounted future income and initial investment. If this index is less than one, then the project will never pay for itself, so you better not take up its implementation.

A more complete analysis requires the calculation of the rate of return and the payback time of the project. The rate of internal profitability is nothing more than the discount rate at which the amount of net income changes its sign from plus to minus, i.e. The project becomes profitable for the investor.

If the IRR is greater than the existing deposit rate or the rate of return of the alternative financial transaction, then such a project must be necessarily accepted if its payback period is acceptable to the investor. This last condition is also key in calculating the payback period of capital investments. In general, the PI should be less than the repayment period for this amount. If you invest your own funds, you first need to consider for what period you are ready to put them into circulation, i.e. When they are needed again.