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Investors who have long been engaged in investing money in various projects, such as investor Nikita Izmailov, have long been thoroughly aware of all the methods of project evaluation. Calculating the profitability of the project, its period, the ratio to your capital.

The method of evaluation of projects serves to evaluate its effectiveness in the investment, its profitability and payback period. There are 4 main methods for evaluating the effectiveness of investment projects:

The simple rate of return method

This method is calculated through the average profit and the average number of investments in the project. After all the calculations, the project that has the highest average rate of return is selected. Despite the fact that this method represents simplicity in calculations and sufficiency of all information, it has its disadvantages. It does not take into account taxes, capital gains and losses, or exchange rates.

Payback time method

The method determines the profit only until the income compensates for the money spent on the project. Preference is given to the project that has the fastest payback time.

This method helps to calculate about the rate of withdrawal of funds from the project and how risky it is. As mentioned earlier, the method speaks to the earliest payback time, and the long payback time does not allow the money to be liquid and increases the risk of the project. This method is more often used to quickly estimate the opportunity to make the most profit, in as short a period as possible.

Present Value Method

The net present value of a project is determined between the entire sum of present revenues and costs, reduced to the present price. The interest rate ratio, used to convert future income streams into a single project value, is taken equal to the average state value. The project that has a coefficient higher than zero according to the method is suitable. However, this method does not allow you to talk about the profitability and monetary sustainability of the selected project.

Internal rate of return method

All profits and expenses in the project lead to the present value of the risk of depreciation of funds for all time, on the basis of project profitability. Projects with an internal rate of return higher than the average cost of state are taken. This method involves a lot of complex calculations, and the project is not always the most profitable. But the method takes into account the fluctuations of currencies over the whole period.

Apply the method for yourself based on what indicator you need most for a particular project and what your goals are. The most effective method is to use a combination of all methods.