When investing in venture funds, always keep 1 thing in perspective. All investments have equal danger, and the normal cost of capital for the company can be used for evaluating investment proposals. Investment proposals differ in danger. An investment proposal to produce a new product, as an example, is likely to be much more risky than one involving replacement of an present plant. In view of such differences, variations in risk need to be thought about in enterprise capital investment appraisal.
In many cases, the earnings expected from a job are estimated to make sure the viability of this proposed project is not easily threatened by adverse circumstances. The capital budgeting methods often have built-in devices for conventional estimation.
A margin of security in venture capital investing is generally contained in estimating cost figures. This fluctuates between 10 and 30 percent of what's deemed as normal cost. The size of the margin is dependent upon how management feels concerning the likely variation in cost. The cut- off point on an investment varies according to the conclusion of management on how insecure the project might be. In one company, substitute investments are okayed when the expected post-tax yield exceeds 15 per cent but new investments have been undertaken only if the expected post-tax return is higher than 20 percent. Another provider employs a short payback period of 3 years to get new investments. Its fund controller said this rule : financial investment
"Our policy will be to take a new job only if it's a payback period of 3 years. We have never, as far as I know, deviated from this. The usage of a brief payback period automatically weeds out more hazardous jobs" Some businesses compute what might be called the total certainty index, dependent on a few crucial factors affecting the success of the project.