Index of return on investments

For every serious person who desires to invest most of his client or his own funds, the main financial process is to determine the most important economic indicators for the investment project. One of them is the net cost of the project. It is determined by a number of factors, including the volume of production and sales of certain brags, as well as the amount of investment. Therefore, the effectiveness of investments does not always correspond to net worth, and an additional financial instrument called the investment return index is used to calculate this main parameter. With its help will be determined the approximate income of the investment project with a certain number of funds invested in it. The income from the investment here will be a discounted cash flow, but not a net profit.

The profitability index, also called the Profitability Index and the profitability index, is an indicator that reflects the investment performance of a particular business project. The profitability index is numerically equal to the ratio of the given value of cash flows to the initial costs of the project, as well as to the investments aimed at its implementation. The index is calculated by the formula: ID = HC / I. NA is the real value of these cash flows, AND is the sum of all investments that are directed to the implementation of the project. In the event that investments are made earlier, their cost is also reduced to this.

If the value of the profitability index is equal to or less than one, it means that the project is unprofitable. In this case, they are rejected, since they are not able to bring an additional income to the investor . Usually only those with a profitability index greater than one are realized. If the index is equal to one, then the project is break-even.

The profitability index is a relative indicator that determines the level of income per unit of costs. The greater its value, the higher the return on investment. That is why when choosing from a number of alternative projects, one uses the profitability index.

In general financial calculations, two types of profitability index are used:

• Index of investment return (ratio of discounted expense to the amount of discount cash flows);
• Index of profitability of costs (the ratio of the amount of costs to the amount of profit) This index, as well as the economic outflows and tributaries used in this calculation, can be discounted.

There is also an index of profitability of discounted investments, with the help of which the problems that arose when finding an internal payback factor are solved. It allows you not to take into account the positive and negative values of cash flows of individual years in forecasting. As a tool for analysis, the discounted yield index is not used enough. This can be explained by the fact that the absolute majority of people holding managerial positions, if they know that there is a discounted index, is not in a position to apply it.

For an internal payback ratio, the confidence rating is forty percent. This suggests that the project is very good, but with the news that the discounted profitability index of the project is 1.10, an interpretation of this fact would be unknown. Since the profitability index is determined by cash flows, any value of this coefficient, even though it exceeds 1.0, is considered acceptable from the perspective of the economic perspective.

Thus, it should be noted that the increase in the income of investors can be most accurately calculated using the above economic instruments.