BusinessManagement

We calculate the profitability of the project

Money makes money. This statement is a key description of the modern economic model. In fact, it can be called true, but in order for money to work and make a profit, it is not enough just to have them. It is also necessary to be able to conduct sometimes rather complicated calculations and choose only those projects in which the invested money is able to bring the necessary returns.

Guaranteed return can not be, therefore, it becomes necessary to analyze the profitability of the project, before risking its own funds. The process of investing itself resembles a game in a casino, only unlike gambling, here the player has a positive expectation. It is the magnitude of this expectation that determines the attractiveness of the project in the eyes of the investor

As for profitability, this indicator reflects the ratio of expected profit to the value of the invested funds. Thus, it is calculated using just one mathematical action - division, but both the numerator and the denominator of this fraction, it is not so easy to determine. The fact is that the profitability of the project is not based on conventional figures, but on 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 absurd, at first glance, affirmation makes sense, if you recall the inflation and loss of profit. That is, the investor could have the means to put in the bank and pick them up after a while, so the calculation of the profitability of the project is conducted taking into account this fact.

To calculate the numerator, which indicates the expected income, you need to sum all the amounts expected to be received throughout the life of the project, previously discounted. The life of the project may be known in advance, but if it is not determined, it is expected to take into account in calculations no more than ten years or the period for which the revenues can be predicted with sufficient accuracy.

For discounting, the expected income should be divided into a discount factor, raised to the extent that years have passed since the time of investing money. The coefficient is calculated as a unit plus the average bank rate that exists at the time of the investment divided by one hundred.

Having counted all possible incomes, it is possible to pass to expenses. In this case, note that in order to reliably determine the profitability of the investment project, you need to consider all investments in the project throughout the life, and not just the initial investment. These most additional investments do not forget to discount, similarly, how the incomes were discounted.

In addition, it is not superfluous to take into account all the alleged risks. This includes possible fines, damage to property, etc. Calculate the possible losses and multiply by the coefficient that determines the probability of a risky event. The resulting amount should also be added to the denominator.

Now, finally, you can determine the very profitability of the project. If it is more than one, the project will be profitable for the investor, if less - unpromising. When comparing different projects, in a more advantageous position there will be one whose profitability index will be higher.

Now you know how to calculate the profitability of the project, and you know how to use this indicator to make investment decisions. However, do not forget that a number of other indicators affect the decision making, and it is not necessary to invest money in the project just because its profitability will be higher.

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