Methods for assessing the effectiveness of investment projects are methods that help determine the appropriateness of long-term capital investments in various assets. With their help, experts can predict the return on projects, as well as the size of future profits. Therefore, each investment object must undergo a thorough analysis to reduce potential risks.
Widely used are methods for assessing the effectiveness of investment projects based on a comparison of profitability. When a person chooses between several objects, it is necessary to anticipate possible profits in advance. The same goes for choosing a bank. The depositor will know in advance at which interest rates are higher, and selects the most profitable option for profit.
Methods for assessing the effectiveness of investment projects are used in all countries of the world. Most often, the analysis is carried out using 5 methods that are combined into two groups. The first includes methods based on the principle of discounting:
- a method in which the net present value is determined;
- a methodology that includes calculating the return on investment, as well as the internal rate of return.
The second group combines three methods. They are called traditional or simple, since they do not use the concept of discounting:
- a technique based on the calculation of the payback period;
- method of annual (design, estimated, average) rate of return;
- the way in which the breakeven point is.
Methods for evaluating the effectiveness of investment projects based on discounting. We will analyze the methodology data in more detail. Discounting is a special way of analyzing investment projects in which the expression of cash flows in the future period in terms of value in the current time takes place. Thus, it is considered how much the investor will receive in connection with the sale of the object as a result, taking into account inflation. Methods for evaluating the effectiveness of investments, which are based on the principle of discounting, are used when investing in large long-term projects.
Consider the second group of methods. Methods that do not include the principle of discounting are also called statistical. They rely on planned, design and actual data on costs and results. When methods are used to assess the effectiveness of investment projects, they resort to calculating the average annual data for the entire investment period. Specialists use this technique in cases where costs and results are unevenly distributed over the years.
If the evaluation principle does not apply the discount principle, then the expert does not take into account the time factor. It consists in the fact that under the influence of inflation, money depreciates. At the same time, a comparative analysis of actual and design data by year becomes difficult. Thus, it is rational to use statistical methods in cases where the implementation of an investment project takes no more than five years. The payback period is small and the costs with the results are often evenly distributed over the period.
Statistical methods are widely used in practice. This is due to the fact that they are quite simple and generally accessible for perception. Specialists of firms can quickly calculate the effectiveness of projects. Data used for evaluation is available. But statistical methods have several disadvantages: ignoring the time factor, covering a short period for investment, uneven distribution of cash flow over the entire life of the project.
When choosing assessment methods, specialists should take into account the type of industry, the specifics of the project, the innovations embodied in it, and other important factors. All this has a positive or negative impact on the final result obtained from the investment.