Methods for assessing the effectiveness of investment projects and their characteristics

Methods for assessing the effectiveness of investmentprojects are ways that help determine the appropriateness of investing capital for a long-term period in various assets. With the help of these experts can predict the payback of projects, as well as the size of future profits. Therefore, every investment object should be carefully analyzed to reduce possible risks.

Methods for assessing effectiveness are widely usedinvestment projects based on a comparison of profitability. When a person chooses between several objects, it is necessary to assume in advance possible profits. The same goes for choosing a bank. The depositor learns in advance which interest rates are higher, and chooses the most profitable option for making a profit.

Methods for assessing the effectiveness of investmentprojects are used in all countries of the world. Most often, the analysis is conducted using 5 methods, which are grouped into two groups. The first includes methods based on the principle of discounting:

- the method by 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, because they do not use the concept of discounting:

- methodology based on the calculation of the payback period;

- method of annual (project, settlement, average) rate of return;

- the way in which the break-even point is located.

Methods for assessing the effectiveness of investmentprojects on the basis of discounting. Let us examine these methods in more detail. Discounting is a special way of analyzing investment projects, in which there is an expression of cash flows in the future period through the value in the current time. Thus, it is considered what amount the investor will receive in connection with the implementation of the object as a result taking into account inflation. Methods for assessing the effectiveness of investments, which are based on the principle of discounting, are used when investing money in large-scale long-term projects.

Let us consider the second group of methods. Methods that do not include the principle of discounting are also called statistical. They rely on planned, project and actual data on costs and results. When methods for assessing the effectiveness of investment projects are used, they resort to calculating the average annual data for the entire investment period. This method specialists use in cases where costs and results are distributed unevenly over the years.

If the project evaluation does not apply the principle ofdiscounting, the expert does not take into account the time factor. It consists in the fact that under the influence of inflation there is a devaluation of money. At the same time, comparative analysis of actual and design data by years becomes difficult. Thus, it is rational to use statistical methods in cases when 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 inpractice. This is due to the fact that they are fairly simple and generally accessible for perception. Specialists of firms can quickly calculate the effectiveness of projects. Data used for evaluation are available. But statistical methods have a number of shortcomings: ignoring the time factor, covering a short period for investment, uneven distribution of cash flow throughout the life of the project.

Specialists in the choice of assessment methods shouldtake into account the type of industry, the specifics of the project, the innovations incorporated in it, and other important factors. All this has a positive or negative effect on the final result obtained from the investment.