how to determine the effectiveness of investments - Read useful advice

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Remember that there are several ways to determine the effectiveness of investments. One of the most widely used methods is the method of determining the effectiveness of investment payback period. It consists in determining the number of years required for full cost recovery, ie the moment when the investment will be profitable. When choosing an investment project to be preferred, in which the payback period of the smallest. Calculation of the payback period is quite simple. It is determined by dividing the value of capital investments in the amount of the annual income generated by them.
To determine the effectiveness of capital investment you can use the simple rate of return. It consists of comparing the average income received from investments, and the cost of funds to the project. This method is quite simple and easy to use in the calculation, but it does not allow to judge the effectiveness of projects that are equal to a simple rate of return, but different values of investments.
If you want to analyze the dynamic efficiency of investments, use the net present value. This figure belongs to the discounted cash flow techniques, ie, bringing their future value to date. The net present value is calculated as the difference between the value of the present value of the cash flow and the amount of initial investment. If the figure takes a positive value, then the project will reimburse the initial investments and provide the necessary profit, as well as some of its reserve. Otherwise, the necessary income is not provided, the project is unprofitable.
On the basis of the net present value calculated internal rate of return, which is the value of the index is the discount at which the current value of the investment is equal to cash flow funds secured at their expense. If the index exceeds the value of the invested capital, the project is accepted, if it is lower than the amount invested, the project is rejected.
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