Investments represent the long-term financial investments made for the purpose of receiving profit in the future. And one of indicators of their work is profitability of investments.
How to calculate profitability of investments?
Profitability of investments shows as far as they are effective. As a rule, for calculation of profitability of investments the formula is used:
ROI = (profit on investments - the cost of investments) * 100%/Cost of investments
To define as far as profitability of investments acquits them, it is necessary to know the product cost, income of the company and an investment spent for marketing (i.e. advertizing and promotion of goods).
The value which will turn out when calculating has to be more than zero, then the project can be considered as effective.
The index of profitability of investments helps to answer us a question, the level of income which will be brought by our project is how high. At the same time this level shows on unit of investments. The index of profitability of investments has a number of advantages:
- considers the fact that real cash flows are distributed in time;
- considers not separate effect of investments, and their sum which was received throughout all project;
- allows to estimate correctly and adequately projects with various scales (for example, the different output).
The coefficient of profitability of investments shows us what level of profitability we receive from investment investments. The coefficient of profitability of investments is calculated by a formula:
, where
Profit is income which is gained for all the time of possession of an asset (capital);
The price of acquisition is the price at which the asset (capital) was bought;
The selling price is the price at which the asset (capital) at the end of possession term will be on sale.
The method of profitability of investments is based that profitability, i.e. the efficiency, at cost has to be lower than the initial project, than invested (so, loan) means. It is necessary to add the sum of percent on the credit to the sum of all costs of a unit of production. So it is the only method which considers that on the investments received for implementation of the project it will be necessary to pay a certain percent. The method of profitability of investments is suitable for the enterprises possessing a wide range of products, at the same time calculation of individual variable costs is necessary for each product. It is suitable and for traditional goods with the settled price, and for novelties.
Calculation of profitability of investments
There are several methods of calculation of profitability of investments:
- calculation of profit (receiving profit is how regular and stable);
- profitability calculation (assessment of increase in cost of the capital).
For definition of the center of profit use an indicator of profitability of investments, it is defined by division of net profit into the volume of investment. In certain cases the indicator of profitability of investments is defined by division of net profit into the sum of the share capital of the company.
The standard of profitability of investments pays off through a discount rate (coefficient for recalculation of future income in the current cost). This figure ideally has to exceed profitability of risk-free investments which pays off before taxation.
Carrying out the assessment of profitability of investments, it is necessary to remember that financial investments are the main driving force of business. They have to provide continuous activity of the enterprise, production and provision of services and also to provide development of the company in the future.