Investment criteria and choice of technique14/03/2023 0 By indiafreenotes
Investment criteria are the standards or principles used to evaluate the attractiveness of investment opportunities. The choice of investment criteria is important because it determines how investments are evaluated and selected. The choice of technique for evaluating investments depends on the investment criteria and the nature of the investment.
Here are some commonly used investment criteria:
- Return on Investment (ROI): ROI measures the profitability of an investment by dividing the net income by the investment amount. It is a commonly used criterion for evaluating investments, particularly in the private sector.
- Net Present Value (NPV): NPV measures the present value of the expected cash flows from an investment, minus the initial investment. It is a popular criterion for evaluating long-term investments and takes into account the time value of money.
- Internal Rate of Return (IRR): IRR is the discount rate that makes the net present value of the investment equal to zero. It is another commonly used criterion for evaluating investments and is often used to compare different investment opportunities.
- Payback Period: Payback period is the length of time it takes to recover the initial investment. It is a popular criterion for evaluating short-term investments and is often used in combination with other criteria.
- Profitability Index (PI): PI is the ratio of the present value of the expected cash flows to the initial investment. It is a measure of the value created per unit of investment and is commonly used in evaluating capital projects.
The choice of investment technique depends on the investment criteria and the nature of the investment. For example, if the investment criteria include maximizing ROI, then the ROI technique may be the most appropriate. If the investment criteria include considering the time value of money, then the NPV or IRR techniques may be more appropriate.