INVESTOR’S TIPS: How to evaluate an investment?
Evaluating an investment project can be one of the most complicated tasks we can find ourselves doing, due to the fact that we move in such an unpredictable environment as financial markets. Once again, we face the great dilemma of economics as a science, which is based on probabilities and not on certainty, resulting in an uncertain future where infinite variables can affect each outcome.
Despite this, there are different models created to evaluate an investment project that have become common. Remember that any investment project demands getting out your comfort zone and put your efforts and hopes to uncertainty in order to generate profits.
Under that definition we find three factors to consider:
- We need investment, usually in fixed assets, made at ground-floor stage.
- We know that the project’s success will be uncertain for a series of years, and maybe for its entire duration, although we should always expect to recover our investment in the first 5 to 10 years.
- Each year we’ll have capital inflows and outflows (Not to be confused with income and expenses). This fluctuation can lead to inflation cause money to not be have the same value overtime. This is a fact we must take into account.
Methods to evaluate an investment project
- Payback Period
It’s the simplest valuation method, and it calculates the time it takes to recover the initial investment by dividing the cost by the annual cash flow. The payback’s easy to calculate but with many cons: it doesn’t take into account what happens to the investment after the payback nor the moneys’ loss of value over time and doesn’t intend to maximize the company’s value.
- Net Present Value
It can measure the business profitability in absolute net terms, which is the number of monetary units. It’s used to value the different investment alternatives. With the NPV calculation, we will know in which investment options we can get greater profits.
The NVP helps to analyze a couple of key factors. On the one hand, to know if the avenue we are pursuing is likely to produce profits, and on the other one, to compare which investment option might be the most advantageous for us.
- Internal Return Rate
It’s a system to evaluate projects as a variant of NVP and is even more used than the NPV due to its simplicity and also its wide range of application for evaluation on different projects. Both the internal rate of return and the return on investment (ROI) are concepts related to the return rate, so we won’t be delving into its definition as to not fall into redundancy.
The underlying idea is the same: estimating whether the money invested in the investment is worth it. If the rate is positive – meaning, profits have been made – then said rate of return becomes a positive parameter for that specific project and our financial decision.
Why is this important?
The evaluation of investment projects is a priority instrument to implement investment initiatives. This technique should be taken as an opportunity to obtain more information by potential investor and should influence his/her decision making, so as to effectively reject an unprofitable project and backed a profitable one.
Having said that, what could be a profitable project?
There’s a company that could be actually become the single most desirable business opportunity for you. Having gone through all of the previously detailed valuation methods and coming off as a solid and promising project. This one company aims to redesign the financial world through a differentiated and innovative new asset class with intrinsic value that’s also highly liquid, integrated within a crowdfunding, trading and banking ecosystem.
This new asset class also acts as a transactional currency and at the same time as an investment asset with liquidity. Is in these types of projects where you’ll frequently find the kind of visionaries that can actually back their ambitions and make them a reality. If you want become one of them and learn more about this profitable opportunity click on the link below!