When investing in venture capital, always keep 1 thing in view. All investments have equivalent risk, and the typical cost of capital for your firm can be used for assessing investment proposals. Investment proposals differ in danger. An investment proposition to produce a new product, for example, is likely to be much more insecure than one between replacement of an present plant. In view of these differences, variations in danger have to be considered in venture capital investment evaluation.
Oftentimes, the earnings expected from a project are estimated to be certain that the viability of the proposed project isn't easily threatened by unfavorable conditions. The capital budgeting systems frequently have built-in devices for conservative estimation.
A margin of safety in venture capital investing is generally contained in estimating cost amounts. This fluctuates between 10 and 30 per cent of what's termed as normal price. The size of the margin depends on how management feels concerning the likely variation in price. The cut- off line in an investment varies based on the judgment of direction on how risky the undertaking might be. In 1 company, substitute investments are okayed if the anticipated post-tax yield exceeds 15 per cent but fresh investments have been undertaken only as long as the expected post-tax return is higher than 20 per cent. Another business employs a short payback period of 3 years to get new investments. Its finance control said this rule as follows: financial investment
"Our policy is to accept a new project only if it has a payback period of three decades. We've never, so far as I am aware, deviated from this. The use of a brief payback period automatically weeds out more risky projects." Some companies calculate what may be called the general certainty index, based on a few crucial factors affecting the success of the project.