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An investment project is the planning of a long term allocation of funds with the objective of generating future profits.
Time frame: An investment project differs from the execution of the investment. The project is made before the execution.
Sources of capital: The investment can be made using own funds or external sources of capital, like borrowing money or issuing bonds or stocks.
Types of Investment Projects:
* High Risk vs Low Risk: high risk investments are those investments that have a high variance of the expected returns. On high risk investments there is a high risk of loss of capital but usually, there is also a higher probability of high returns, when compared with low risk investment projects.
* Public vs Private Investment: public investments are carried by the government or by government contracted businesses. Examples of public investments are the construction of new roads, hospitals, ports, etc. Private investment is carried by private companies or individuals.
An important part of any investment is the evaluation of its profitability. During the evaluation of the investment project, several measures for capital budget decisions will be made, including:
Because this is done before the actual execution of the project, only the best performing projects (according to the estimates) will be carried on. The objective is to maximize profits (for private investments) or to maximize public well-being (for public investments).
The evaluation of investment projects requires to estimate future profits and expenditures. High risk investment projects are more difficult to evaluate, because there is a high volatility on variables that will define the expected return, like the price or the quantity of sales.