Understanding Compound Interest, Annuities, and Project Evaluation
Compound Interest
When interest is added to the principal, creating a new base for future interest calculations, the investment is said to be capitalized.
Annuities: Future Value
An annuity is a series of periodic payments made at equal intervals.
Types of Annuities
- Certain: Financial transactions with guaranteed payments.
- Uncertain: Annuities with variable payments.
- Expired: Payments made at the end of each period.
- Advance: Payments made at the beginning of each period.
Future Value of an Annuity
This is the accumulated value at the end of the annuity term, representing the sum of all individual payments and their compounded interest.
Depreciation Rate
The depreciation rate is a tool to observe, through a series of payments, the ratio of each payment saved with its rightful interest over time. It also shows how unpaid balances are generated and the discounting of the initial debt.
Advantages of Understanding Depreciation
- Understand how debts are written off.
- Know the balance of a debt by a certain date.
- See the overall balance at a specific date.
- Recognize that debt is represented by the present value of an annuity (equal payments at equal intervals).
- Understand that interest charges are higher in the earlier stages, and as payments are made, these interest payments become nominally lower.
Study Project: Investment Project Preparation and Evaluation
Project Definition
A project is a perspective view of an economic activity involving investment to develop a productive activity. It aims for the optimum use of resources to create goods and services that meet a need.
Investment Project Definition
An investment project is a solution to a problem that tends to address a human need.
Investment Project (Detailed)
An investment project is an ordered set of studies that allow us to determine the future behavior of a productive activity.
Project Milestones
- Identifying the need
- Creating the idea
- Developing the profile of the idea
- Preparation of the Draft
- Preparation of the final draft
- Project evaluation
- Choosing investment options
- Implementation and enforcement
- Operation and monitoring
Flowchart: Investment Project
Idea-Draft-Project-Evaluation-Implementation-Transaction-Production-(Meet)-Need
Private Criteria for Project Evaluation
Valuation criteria applied to private companies focus on the techno-economic viability of the investment. These methods measure the return on investment or profits in terms of money the company will receive.
Factors Influencing Project Success or Failure
- Changes in technology
- Changes in the political context
- Changes in trade relations
- Instability of nature
- Institutional environment
- Legal norms
Project Evaluation Process
- Project Idea
- Environmental Scan
- Detection of needs
- Analysis of opportunities to meet needs
- Conceptual definition of the project
- Decision on project
- Project implementation
Project Stages
Profile of great vision: Developed from existing information, common opinion, and experience. Calculations are global for investment and cost.
Draft: Research deepens from different sources, detailing the technology to use, determining total costs, and market return to make a final decision.
Final project: Contains all project information, including the contract sales price of the investment.