Investment Evaluation is the two-fold task of balancing investment risk against anticipated return. When evaluating an investment emphasis should be laid on the question “Will the expected return justify the risk?” rather than on “What is the rate of return?”we can project the clients’ sources and applications of funds for the upcoming time periods.
- Widely used methods of investment analysis are payback period, internal rate of return and net present value. Each provides some measure of the estimated return on an investment based on various assumptions and investment horizons.
- When a future investment is examined we compare its cost vs its revenue. Cost is the cash outflow needed for the investment and revenue includes the future income stream and / or the proceeds from the sale of the investment at the end of a period of time (because money has a time value, the investment’s cash flows must be recorded as they are expected to occur).