When investing in venture funds, always keep one thing in perspective. All investments have equal risk, and the average cost of capital for the firm can be used for evaluating investment proposals. Investment proposals differ in danger. An investment proposition to produce a new solution, for instance, is likely to become more insecure than one between the replacement of an current plant. In view of such differences, variations in danger need to be considered in enterprise capital investment appraisal.
In many cases, the revenues expected from a job are conservatively estimated to make sure that the viability of the proposed project isn't easily threatened by adverse circumstances. The capital budgeting systems often have built-in devices for conservative estimation.
A margin of security at venture capital investing is generally contained in estimating cost figures. This varies between 10 and 30 per cent of what is termed as normal price. The size of this margin is dependent upon how management feels regarding the probable variation in price. The cut- off point in an investment varies based on the conclusion of direction on how risky the undertaking may be. In one company, substitute investments are okayed when the expected post-tax yield exceeds 15 percent but new investments have been undertaken only if the anticipated post-tax yield is greater than 20 per cent. Another business employs a brief payback period of three years for new investments. Its fund controller stated this rule : Technical consultations
"Our policy is to take a new project only if it's a payback period of 3 years. We have never, so far as I know, deviated from this. The usage of a short payback period automatically weeds out speculative projects." Some businesses compute what may be known as the overall certainty index, dependent on some crucial factors affecting the achievement of the undertaking.