Investments. Methods for evaluating investment projects (the most important)

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Investments. Methods for evaluating investment projects (the most important)

Lecture notes, cheat sheets

Directory / Lecture notes, cheat sheets

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METHODS FOR ASSESSING INVESTMENT PROJECTS

There are both simple and complex methods for evaluating an investment project.

Simple methods for evaluating investment projects include:

1) determination of the payback period of investments - this is the period of time at the end of which the amount of the increase in funds from the implementation of the investment project will be equal to the initial amount of capital investment in the investment project. That is, the payback period characterizes the period of time during which the investment made by the investor in the project will be reimbursed by the income from its implementation.

The payback period can be determined with or without discounted cash flows. The payback period, taking into account discounting, is the duration of the period from the initial moment to "the moment of payback, taking into account discounting". The payback moment, taking into account discounting, is the earliest point in time in the billing period, after which the current net discounted income becomes and remains non-negative in the future;

2) the method of calculating the return on invested capital. This method is based on the use of information about cash flows, about the possibility of making a profit from the implementation of an investment project. This method has a number of disadvantages due to the fact that it does not take into account the time component of cash flows, does not distinguish between projects with the same amount of average annual profit, but a varying amount of profit over the years, between projects that have the same average annual profit, but generated over a different number of years. .

Complex methods for evaluating investment projects include:

1) the methodology for determining the value of investments when using compound interest - based on the reinvestment of annual interest income. As a result, the investor receives income both from the initially invested capital and from interest received in previous years.

This technique is called compounding, i.e. bringing costs and results to the final point in time;

2) the method of calculating the net present value of the investment project (net present value, integral economic effect) - the excess of the integral (for the estimated period of time) discounted cash receipts over the integral discounted cash payments due to the implementation of the investment project;

3) determination of the internal rate of return of investment projects - the discount rate that vanishes the value of the net present value. It reflects the amount of income per unit of investment invested in the project.

Author: Kuznetsova S.A.

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