When investing in venture capital, keep one thing in perspective. All investments have equivalent danger, and the typical cost of funds for your company may be used for assessing investment proposals. Investment proposals differ in risk. An investment proposal to manufacture a new product, for example, is likely to be much more insecure than one involving the replacement of an present plant. In view of these differences, variations in risk have to be thought about in enterprise capital investment appraisal.
In many cases, the revenues expected from a job are conservatively estimated to guarantee that the viability of this proposed project isn't easily threatened by adverse conditions. The capital budgeting methods often have built-in devices for conventional estimation.
A margin of security in venture capital investing is usually contained in estimating price figures. This varies between 10 and 30 per cent of what's deemed as normal cost. The size of the margin is dependent upon how management feels regarding the possible variation in price. The cut- off point on an investment varies in line with the judgment of management on how insecure the project may be. In 1 company, replacement investments are okayed if the anticipated post-tax yield exceeds 15 percent but fresh investments have been undertaken only as long as the expected post-tax yield is greater than 20 per cent. Another provider employs a brief payback period of 3 years to get new investments. Its fund control stated this rule : vc investment
"Our policy is to take a new project only if it's a payback period of three years. We have never, so far as I am aware, deviated from this. The use of a brief payback period automatically weeds out more hazardous projects." Some businesses calculate what might be called the general certainty indicator, dependent on a few crucial elements affecting the achievement of the project.