When investing in venture capital, always keep 1 thing in perspective. All investments have equivalent danger, and the normal cost of funds for your company may be used for assessing investment proposals. Investment proposals differ in danger. An investment proposal to produce a new solution, for example, is very likely to be more insecure than one involving the replacement of an present plant. In view of such gaps, variations in danger need to be considered in enterprise capital investment appraisal.
In many cases, the earnings expected from a job are conservatively estimated to be sure that the viability of the proposed project is not easily threatened by adverse circumstances. The capital budgeting methods often have built-in devices for conservative estimation.
A margin of security in venture capital investing is usually contained in estimating price amounts. This fluctuates between 10 and 30 percent of what is termed as normal price. The size of this margin is dependent upon how management feels regarding the possible variation in cost. The cut- off line in an investment varies in line with the judgment of management on how risky the undertaking may be. In 1 company, substitute investments are okayed if the anticipated post-tax yield exceeds 15 percent but new investments are undertaken only if the anticipated post-tax yield is higher than 20 percent. Another company employs a short payback period of three years for new investments. Its fund controller said this rule as follows: Technical consultations
"Our policy is to accept a new project only if it has a payback period of 3 decades. We've never, so far as I am aware, deviated from this. The use of a brief payback period automatically weeds out speculative jobs" Some companies calculate what might be called the total certainty index, dependent on some crucial factors affecting the success of the undertaking.