When investing in venture capital, always keep one thing in perspective. All investments have equal danger, and also the normal cost of capital for your firm can be used for assessing investment proposals. Investment proposals differ in risk. An investment proposal to produce a new product, for instance, is likely to become more risky than one between the replacement of an existing plant. In view of such differences, variations in risk have to be considered in venture capital investment appraisal.
Oftentimes, the revenues expected from a project are estimated to make sure that the viability of the proposed project isn't readily threatened by adverse circumstances. The capital budgeting systems frequently have built-in apparatus for conventional estimation.
A margin of security in venture capital investing is usually included in estimating cost amounts. This varies between 10 and 30 percent of what's termed as normal price. The size of this margin is dependent upon how management feels concerning the possible variation in price. The cut- off line in an investment varies according to the judgment of direction on how risky the project might be. In one company, replacement investments are okayed if the anticipated post-tax yield exceeds 15 per cent but new investments are undertaken only as long as the anticipated post-tax return is greater than 20 per cent. Another business employs a short payback period of 3 years to get new investments. Its fund controller stated this rule : investment companies
"Our policy is to take a new project only if it's a payback period of 3 decades. We've never, so far as I am aware, deviated from this. The usage of a brief payback period automatically weeds out risky projects." Some businesses compute what may be called the total certainty index, based on a few crucial elements affecting the achievement of the project.