Investment analysis, the primary function of finance is probably the 2nd most favorite tool of investors. The 1st favorite function is of course, multiplication of their capital. Investment analysis enables an investor to see a vivid picture of future cash flows of any desired project .investment analysis also recommends (with facts & figures) an investor to choose the rational among different available options. Investment analysis, a wonder tool with 14 ratios and a predefined format for mutually exclusive project supports investments and thus keeps circle of wealth almost risk free where each of the participant takes his fair shares. Business, an “idea” can attract many investors of your choice but the proposal must be rational enough and accompanied with investment analysis.
The following are primary key areas investment analysis highlights for investors.
- Mutually exclusive projects
- Associated risks
- Payback period
- Return on investments (ROI)
Mutually exclusive projects
“Every opportunity has an equaling cost”
To avail one opportunity you must have to leave other available opportunities thus the opportunities (you leave) are considered as cost of the availed option. Mutually exclusive are the projects where you have to select only one. This can be because of the returns on investments, associated risks, duration of project or limitation of available resources (funds, time, manpower etc). Investment analysis drives an investor through forecasted results and thus equipped him to come to a rational investment decision.
“Higher the risks, higher the returns but recommended practice is to go for calculated risks”
Business or investment is meant to take risks. Investment analysis addresses associated risks of a project and supports an investment decision with calculated risks only. Investment analysis encounters all risk factors (micro and macro) and suggests a solution set to minimize risks. Remember guys, investor needs to secure his capital (invested amount) at 1st place. The following can be major risk factors involved and need to be addressed
- External Risk Factors: Time & inflation, political instability, industrial risk factors, change in regulation for the said industry often called uncontrollable risks.
- Internal Risk Factors: Productivity, processing, internal errors affecting results of a project are often called controllable risks.
“Time is the biggest risk factor in any investment decision”
These are the inflows of any project. Time, the major risk factor against any investment decision should be calculated without any mistakes. An investor will never select any investment decision with longer period of time or a project with fluctuated inflows. Investment analysis recommends investing in a project with short time period even if returns are lower than other projects. The idea beyond is, once received the returns (capital plus profits) in shorter time, you can again invest in other projects while projects with longer period of time may drown your very own capital (bad debts are receivables with longer period of time).
Return on Investment (ROI)
“ROI is the main charm for investors”
Return on investment focus on calculation of net profits of any project. An investor may choose to invest in a project with higher risks only and only if; the return are much higher and matches the taken risks.