When investing in venture capital, keep 1 thing in view. All investments have equivalent risk, and also the average cost of funds for your company may be used for evaluating investment proposals. Investment proposals differ in risk. An investment proposition to manufacture a new solution, for example, is very likely to be more insecure than one involving replacement of an current plant. In view of these gaps, variations in danger have to be considered in enterprise capital investment evaluation.
In many cases, the earnings expected from a project are conservatively estimated to ensure the viability of this proposed project is not easily threatened by unfavorable circumstances. The capital budgeting systems often have built-in devices for conventional estimation.
A margin of security within venture capital investing is generally included 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 about the probable variation in price. The cut- off line on an investment varies according to the judgment of management on how risky the undertaking might be. In 1 company, substitute investments are okayed if the expected post-tax yield exceeds 15 per cent but fresh investments are undertaken only as long as the expected post-tax return is higher than 20 per cent. Another provider employs a short payback period of three years to get new investments. Its fund control said this rule : venture capital
"Our policy will be to take a new project only if it has a payback period of three decades. We have never, as far as I know, deviated from this. The use of a short payback period automatically weeds out more speculative projects." Some businesses calculate what may be called the total certainty indicator, based on a few crucial elements affecting the achievement of the project.