Investment and investment project valuationOne of the fundamental laws of the modern economy - money must work, that is, it is irrational to just keep money, it should be invested to make a profit. In this case, one of the prerequisites for the successful investment of available funds is a timely and fair valuation of the economic efficiency of a subject investment.
It is necessary to distinguish the differences between the cost and economic valuation of investments that are similar in nature, but meet various different requirements. The cost valuation is carried out, as a rule, to raise funds for the implementation of an investment project and involves an independent appraisal in full compliance with the standards of valuation to obtain an official report. The economic valuation of an investment project aims to make a decision on whether or not to invest in a specific project, which allows for a less rigid framework when choosing a valuation technique, and the presentation of its results.
Actually, both the cost and economic valuations of an investment and investment projects are rooted in the construction and subsequent analysis of the economic and mathematical models of the project's realization process. The main criteria taken into account in the analysis of an investment project are the payback period, profitability and risk factors.
The type of investment plays an essential role for a proper valuation of an investment project because different types of investment have different purposes and economic consequences for investors. According to the degree of investor participation, investments are generally divided into 'direct' types, which means the investor is directly involved in management, and 'portfolio' investment types, assuming a passive ownership of stock in selected companies. There are also investments distinguished by the type of objects at hand, for example, 'real' objects like buildings, structures or equipment and 'financial' investments, like the purchase of securities and intangible investments in patents, trademarks, etc. It is important to bear in mind that each type of investment has its own specificity and valuation of investment projects should be carried out using methods that are relevant to their type.
For example, the valuation of a financial investment depends on the types of securities involved, the expected date of its purchase and the level of investor participation in the management of the company where the shares are being purchased.
Typically, valuation of the investment attractiveness of a project involves the answers to three basic questions: the required investment, the economic efficiency of the project and the ratio of expected return to the possible risks. It is advisable to not only assess the effectiveness of proposed investments, but also to valuate possible alternatives, including the possibility of complete failure of the implementation of the investment project.
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