Dynamic evaluation methods
Posted: Sun Jan 12, 2025 8:01 am
Methods for assessing the investment attractiveness of a project
Choosing the right tools to research investment attractiveness is the foundation of a successful business decision. Let's look at the techniques that will help you make an informed investment decision.
Static evaluation methods
Static methods are easy to use and provide a quick overview of a project's potential. They are especially useful in the early stages of planning.
Payback Period
This method answers the question: "How quickly will the money invested be returned?" Imagine that you are opening a coffee shop. The payback period will show how long it will take for the income from coffee sales to cover your initial costs.
Static evaluation methods
Source: shutterstock.com
Advantages:
Ease of calculation
Understandability for non-specialists
Flaws:
Does not take into account cash flows after the payback period
Ignores the time value of money
Profitability Index
This indicator shows how much profit each ruble invested will bring. If you invest in the production of electric scooters, the profitability ratio will show how profitable this investment is compared to other opportunities.
Advantages:
Allows you to compare projects of different scales
Takes into account all cash flows of the project
Flaws:
Does not show the absolute value of income
May produce distorted results with non-standard cash flows
These methods take into account the change in the value of money over time, which makes them more accurate, especially for long-term projects.
Net Present Value (NPV)
NPV shows how much money sweden telegram data a project will make, taking into account inflation and alternative investment options. If you are considering expanding your chain of fitness clubs, a positive NPV would indicate that the project will increase the value of your business.
Advantages:
Takes into account all cash flows and their distribution over time
Allows you to compare different projects
Flaws:
Difficulty in Determining the Discount Rate
Does not take into account the possibility of changing project conditions
Internal Rate of Return (IRR)
IRR is the interest rate at which the NPV of the project is zero. It shows the maximum acceptable cost of capital raised to finance the project. For example, if the IRR of your project to launch a food delivery service is 20%, and the bank offers a loan at 15%, the project looks attractive.
Choosing the right tools to research investment attractiveness is the foundation of a successful business decision. Let's look at the techniques that will help you make an informed investment decision.
Static evaluation methods
Static methods are easy to use and provide a quick overview of a project's potential. They are especially useful in the early stages of planning.
Payback Period
This method answers the question: "How quickly will the money invested be returned?" Imagine that you are opening a coffee shop. The payback period will show how long it will take for the income from coffee sales to cover your initial costs.
Static evaluation methods
Source: shutterstock.com
Advantages:
Ease of calculation
Understandability for non-specialists
Flaws:
Does not take into account cash flows after the payback period
Ignores the time value of money
Profitability Index
This indicator shows how much profit each ruble invested will bring. If you invest in the production of electric scooters, the profitability ratio will show how profitable this investment is compared to other opportunities.
Advantages:
Allows you to compare projects of different scales
Takes into account all cash flows of the project
Flaws:
Does not show the absolute value of income
May produce distorted results with non-standard cash flows
These methods take into account the change in the value of money over time, which makes them more accurate, especially for long-term projects.
Net Present Value (NPV)
NPV shows how much money sweden telegram data a project will make, taking into account inflation and alternative investment options. If you are considering expanding your chain of fitness clubs, a positive NPV would indicate that the project will increase the value of your business.
Advantages:
Takes into account all cash flows and their distribution over time
Allows you to compare different projects
Flaws:
Difficulty in Determining the Discount Rate
Does not take into account the possibility of changing project conditions
Internal Rate of Return (IRR)
IRR is the interest rate at which the NPV of the project is zero. It shows the maximum acceptable cost of capital raised to finance the project. For example, if the IRR of your project to launch a food delivery service is 20%, and the bank offers a loan at 15%, the project looks attractive.