When investing in venture funds, always keep one thing in view. All investments have equal danger, and the normal cost of funds for the company can be used for evaluating investment proposals. Investment proposals differ in risk. An investment proposition to manufacture a new item, for example, is very likely to be much more risky than one involving replacement of an existing plant. In view of such differences, variations in risk have to be thought about in enterprise capital investment evaluation.
In many cases, the revenues expected from a job are conservatively estimated to make certain that the viability of the proposed project is not easily threatened by adverse circumstances. The capital budgeting systems frequently have built-in apparatus for conservative estimation.
A margin of security at venture capital investing is generally contained in estimating cost amounts. This fluctuates between 10 and 30 percent of what's deemed as normal cost. The size of this margin depends on how management feels about the probable variation in price. The cut- off line on an investment varies in line with the judgment of direction on how risky the undertaking may be. In one company, replacement investments are okayed if the anticipated post-tax return exceeds 15 per cent but fresh investments are undertaken only if the expected post-tax return is greater than 20 percent. Another business employs a short payback period of 3 years for new investments. Its finance control said this rule : vc investment
"Our policy will be to take a new job only if it has a payback period of 3 years. We've never, as far as I know, deviated from this. The usage of a short payback period automatically weeds out more risky jobs" Some companies calculate what might be known as the general certainty indicator, based on some crucial factors affecting the achievement of the project.