Choice of investment

The choice of investment is one of the fields of the Finance. In the Finance of company, it consists in identifying the most profitable Investissement S, i.e. to generally choose between alternate Investissement S (machine tool has or machine tool B?). But overall, for example of Finance of market, the choice of investment consists in evaluating credits to decide Allowance of the resources (see evaluation of action, evaluation of obligation).

Principle of the choice of investment

The Investissement S correspond before very to economic choices: (Project S of development or rationalization of existances activities, launching of new activities… As there exist generally several solutions for launching such projects, the question of the choice of the means arises, therefore type of suitable investments.

These investments must from the financial point of view create value, i.e. to bring back a Rate of profitability higher than the Opportunity cost of the capital. An investment which creates value will enrich the financeurs (Actionnaire S, Banque), an investment which destroys value will impoverish them, this is immutable.

Step of choice of investment

In general, one proceeds in the following way:

  • identification of the Investment
  • determination of flows specific to the investment:
    • capital cost, by including all the related spending
    • Flux of treasury which will be released by this investment
    • lifespan of the investment
    • flow of end-of-life, corresponding to the receipts, or expenditure, arriving at the end of the use of the investment (fresh of dismantling, transfer,…)
  • use of selection criteria of investment
    • clear Current value (VAN)
    • Payback (Time of recovery)
    • Internal Rate of Output (TIR) or Rate of profitability interns (TRI)
    • Indice of profitability
  • Analyze of sensitivity of the results to various scenarios
  • Decision making

Selection criteria of investment

  • VAN (clear Current value) represents the difference between the initial costs of the Investissement, and the current value of the Flux of treasury released by this Investissement.

  • the Payback (time of recovery) represents the time necessary so that the Flux of treasury released make profitable the initial capital cost.
  • the Internal Rate of Output (TIR) or Rate of profitability interns (TRI) represents the rate of Actualisation which cancels the VAN.
  • the index of profitability represents the relationship between the engaged investment, and the Flux of released treasury.

See too

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