Assessment of efficiency of investment projects is important

The level of profitability of activity of the enterprise is affected by how quickly and correctly the entrepreneur is able to make decisions regarding the investment of available funds. It is therefore important to assess the effectiveness of investment projects. It aims to identify possible risk and predict the potential amount of profit associated with the implementation.

Therefore, the assessment of economic efficiency of the investment project includes the use of statistical methods that take into account the time factor that is crucial for the investor. In order to compare the future income for the project and the necessary investment today, using a mathematical method of discounting. Evaluation of the effectiveness of the investment project taking into account the factors that lead to depreciation of money. The analysis calculated the effect of changes in commodity prices, increase or decrease in sales volume and market demand for products, as well as costs associated with product sales.

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

Thus, assessment of efficiency of investment projects begins with the calculation of the integral indicator of the level of net income, which represents the difference between the future income from the project, discounted to the time factor, and the required original receipts. If the given index is less than zero, then further consideration of such investment does not make sense. Further assessment of efficiency of investment projects requires the calculation of the efficiency of use of material resources and profitability, which represents the quotient of discounted future revenues and the initial investment. If the index is less than unity, then the project will never pay back, so you better not to be taken for its implementation.

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A More complete analysis requires the calculation of rate of return and the payback time of the project. The internal rate of return – this is not that other, as the discount rate at which the amount of net income changes sign from plus to minus, i.e. the project becomes profitable for the investor.

If IRR is more existing Deposit rate or rate of return on alternative financial transaction, such a project should be accepted if its payback period is acceptable to the investor. This last condition is key in the calculation of the payback period. In the General case, PI must be less than the term of repayment on this amount. If you invest your own funds, you must first decide on what period you are ready to put them into circulation, i.e. when they are needed again.