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Investment Criteria

Devry University

Investment Criteria

Methods

These methods take into account the time preference for money. Many people would rather have money now than in the future. This arises from the consumption needs, as well the fact that money has a productive value. The interest can be considered as the rate that future money can be exchanged for gift money. In order to make valid comparisons between projects with different cash flows, it is necessary to consider a synchronization between input-output, in terms of and cost benefits. The discount is then used to bring this day, in present value terms, an amount to be received at a future date.

TABELA.1. Project evaluation criteria for the rate of return. 

  | Year | The Project | Project B | Project C |

Investment |   | 1,000.00 | 1,000.00 | 1,000.00 |

  |

Profit (after depreciation) | 1 | 200 | 300 | 550 |

  | 2 | 500 | 1,000 | 550 |

| 3 | 500 | 500 | 550 |

| 4 | 1,000 | 400 | 550 |

| 5 | 0 | 0 | 550 |

|

Total |   | 2,200 | 2,200 | 2,750 |

  |

Project life |   | 4 years | 4 years | 5 years |

Average annual increase in profits |   | 550 | 550 | 550 |

Rate of return on the initial investment |   | 55% | 55% | 55% |

Rate of return on the average amount invested |   | 27.5% | 27.5% | 27.5% |

Rates and discount factors

The discount rate is the rate of time preference for money and can be considered as being similar to an interest rate. A high time preference for money, means the existence of high discount rate. The discount factor is the factor with which we discount future money in order to make it comparable with this money, or, in other words, to compare future values ​​present values. 

Analysis of general and specific

In the overall analysis, the method of acquiring resources is ignored so that a definite program of development for a typical farm is analyzed without the need to consider funding and financing costs. Assume that the farmer has money, and...