{"id":22770,"date":"2007-06-07T08:27:00","date_gmt":"2007-06-07T08:27:00","guid":{"rendered":"https:\/\/clusterfamilyoffice.com\/blog\/?p=601"},"modified":"2007-06-07T08:27:00","modified_gmt":"2007-06-07T08:27:00","slug":"criterios-clasicos-de-valoracion-y-seleccion-de-inversiones","status":"publish","type":"post","link":"https:\/\/clusterfamilyoffice.com\/en\/criterios-clasicos-de-valoracion-y-seleccion-de-inversiones\/","title":{"rendered":"Classic investment appraisal and selection criteria."},"content":{"rendered":"

\"\"<\/a><\/p>\n

The concept of investment is one of the most difficult economic concepts to define. The most general definition that can be given is that, through investment, there is an exchange of an immediate and certain satisfaction that is renounced, against a hope that is acquired and of which the invested good is the support.<\/div>\n
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When it comes to investment, we are faced with a fundamental problem: determining the profitability of the investment project to decide whether or not to carry it out, and also, when a list of investment alternatives is available, these can be ordered from highest to lowest profitability, with the aim of prioritise<\/span> the most profitable. <\/div>\n
<\/div>\n
There are various criteria for valuation and selection of investments, some of them are:<\/div>\n
    \n
  1. \n
    Total net cash flow criterion per committed monetary unit.<\/strong>
    This method consists of adding up all the cash flows and then dividing the total by the initial outlay to obtain the \u201caverage total net cash flow per monetary unit committed\u201d to the investment.
    When this flow is greater than one unit, it is worthwhile to make the investment, otherwise the investment would not allow the capital invested to be recovered.
    This method has several shortcomings, one of which is that it does not take into account the timing of the different net cash flows.
    On the other hand, only the part that exceeds unity is profitability in the strict sense, because the other part is capital recovery.<\/p>\n<\/div>\n<\/li>\n
  2. \n
    Average annual net cash flow criterion per committed monetary unit
    <\/strong>This criterion is the ratio between the average annual net cash flow and the initial outlay.
    If the investment, as usual, gives rise to outlays not only in the present but also in the first years of its life, the sum of these negative flows must be taken as outlays. This method has the same shortcomings as the first method.<\/p>\n<\/div>\n<\/li>\n
  3. \n
    Recovery period criterion or \u201cpayback<\/span>\u201d.
    <\/strong>The recovery time is the time it takes to recover (amortise<\/span>) the initial outlay.
    According to this criterion, the best investments are those with the shortest payback period, although this is debatable: it does not consider the net cash flows earned after the payback period and does not take into account the difference in maturity of the flows earned before the payback period.<\/p>\n<\/div>\n<\/li>\n
  4. \n
    Accounting rate of return criterion.
    <\/strong>This method is the one that best matches the information provided by the accounts.
    It is calculated as the ratio between the annual accounting profit (after deduction of depreciation and taxes) and the initial investment outlay. It includes investment in fixed assets and also in current assets.
    This method uses the concept of profit rather than cash flow. In accounting terms, income is accounted for when it is generated even if it is not actually collected, so that profits cannot be invested in a productive asset or distributed as dividends until they are collected. Accounting performance does not take into account whether or not those profits are collected.
    On the other hand, this method also does not update profits and considers a profit in the first year as equally desirable as a profit in a later year.<\/p>\n<\/div>\n<\/li>\n
  5. \n
    Capital value criterion<\/strong>
    The capital value of an investment is equal to the present value of all expected returns.
    VC<\/span>= - A + (Q1\/ (1 +K)) + (Q2\/(1+K)^2) + (Q3\/(1+K)^3)+.....+(Qn\/(1+K)^n)
    VC<\/span> is the capital value
    A is the size of the investment
    Q is the net cash flow for each year.
    K is the interest or market discount rate
    ^ en high<\/span> a
    n is the number of years, from year 1 to the last year, denoted n.
    According to this criterion, only investments with a positive capital value should be made. If there are several investments with a positive capital value, priority should be given to those with a higher capital value.
    The advantage of capital value is that it takes into account different maturities of cash flows.
    One of the shortcomings is the difficulty of specifying a discount rate K - it is assumed to be the market interest rate, but what can be said to be the market interest rate? The interest charged by the bank on its loans, the interest paid on treasury debt, the interest paid on the government's debt, the interest charged by the bank on its loans, the interest paid on the government's debt, the Euribor<\/span>,....
    Another shortcoming of this criterion is that it assumes that positive cash flows are reinvested<\/span> immediately at an interest rate K equal to the discount rate and that the negative cash flows are financed with resources whose cost is also K. We already know that this is totally unrealistic.<\/p>\n<\/div>\n<\/li>\n
  6. \n
    The payback<\/span> discounted
    <\/strong>One of the criticisms of the payback<\/span> was that it did not take into account the timing of cash flow generation, if cash flows are discounted using the \u201ccapital value\u201d discounting formula, this drawback is eliminated.<\/p>\n<\/div>\n<\/li>\n
  7. \n
    The profitability index or profit-to-cost ratio.
    <\/strong>It is obtained by dividing the present value of the net cash flows, or cash<\/span> flow<\/span> of the investment in terms of the initial outlay or size of the investment.
    The shortcoming of this index is that it measures performance over the life of the investment and not on an annual time basis, as is usual.<\/p>\n<\/div>\n<\/li>\n
  8. \n
    Internal rate of return criterion
    <\/strong>The rate of return or internal rate of return of an investment is that discount rate R, which makes the capital value equal to zero.
    VC<\/span>= 0 = - A + (Q1\/(1+R)) + (Q2\/(1+R)^2) + (Q3\/(1+R)^3)+.....+(Qn\/(1+R)^n)
    Only projects whose rate of return R is higher than the cost of capital K will be of interest. See prioritise<\/span> investments with a higher rate of return.
    To solve this equation of degree n, the easiest way is to use a financial calculator or, by trial and error, enter values of R until we get as close as possible to VC<\/span> = 0. <\/div>\n<\/li>\n<\/ol>\n

    <\/p>\n

    On the other hand, there is a clear effect of the inflation and taxes<\/em> when calculating the potential return on our investment.<\/p>\n<\/div>\n
    To take these two factors into account in the calculation of the Capital Value, the formula would be as follows: <\/div>\n
    VC<\/span>= - A + ((Q1 - tQ<\/span>1)\/ ((1 +K)*(1 +g)) + ((Q2 - tQ<\/span>2)\/((1+K)^2*(1 + g)^2)) +.....+(((Qn<\/span> \u2013 tQn<\/span>)\/((1+K)^n * (1 + g)^n))) <\/div>\n
    Where t is the tax rate and g is the expected inflation.<\/div>\n
    \"\"
    All these methods are deterministic. The magnitudes defining the investment problem are considered to be perfectly known. The economic reality is different. It is difficult to know the future with precision. There are methods that introduce that component of risk or probability into the formulas, which makes them even more complicated, taking into account mathematical expectation, variance, .... but I think that would be excessive theorising.<\/div>\n

    In addition to all these methods, it is above all personal preference and the psychological aspect that must be taken into account, because the more we like our investment, the more time and attention we will devote to it.<\/p>","protected":false},"excerpt":{"rendered":"

    El concepto de inversi\u00f3n es uno de los conceptos econ\u00f3micos m\u00e1s dif\u00edcil de delimitar. La definici\u00f3n m\u00e1s general que se puede dar es que, mediante la inversi\u00f3n, tiene lugar el cambio de una satisfacci\u00f3n inmediata y cierta a la que se renuncia, contra una esperanza que se adquiere y de la cual el bien invertido […]<\/p>\n","protected":false},"author":6,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[20],"tags":[],"class_list":["post-22770","post","type-post","status-publish","format-standard","hentry","category-sin-categorizar"],"_links":{"self":[{"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/posts\/22770","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/users\/6"}],"replies":[{"embeddable":true,"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/comments?post=22770"}],"version-history":[{"count":0,"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/posts\/22770\/revisions"}],"wp:attachment":[{"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/media?parent=22770"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/categories?post=22770"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/tags?post=22770"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}