The index method adjusts the rate of return on projects using the terminal value, allowing for quick evaluation of multiple projects. However, it has flaws such as not accounting for inflation and longer project durations. The rentability index is an alternative formula that combines the index method and net present value method.
The index method is an alternative formula whereby a company can adjust the rate of return on specific projects. Many companies use medical techniques such as the net present value or the internal yield fee for the analysis of financial projects. The index method can use the terminal value, the value of a project at the end of the period, to obtain a return fee. A common formula here is the principal multiplied by one more interest rate, with the last part of the formula affected by the number of years for the project. This formula is similar to the interest fee formula applied to the banks.
An example of the índice método would look at the possible financial returns of a special product. The complete project will normally result in an evaluation based on the financial returns of the capital generated in the project. For example, the total cost of the project is $150,000 US dollars (USD) with a potential interest fee, or cost of capital, of the new one hundred and a total duration of the project for five years. The terminal cost value for this project is $230,794 USD at the end of the project. Entonces, the company will need to pay this cost through the inputs to raise a claim.
Using an index method for project evaluation usually be a simple process. It also allows one company to evaluate multiple projects in a short period of time. This allows a company to quickly place evaluations in multiple projects and select the most rentable function of the calculated figures. Another option for this formula is to alter the cost of capital of external funds. Changing this figure comes from the different types of externos funds available from los prestamistas y otras fuentes.
The index method is not free from defects. For example, inflation is not taken into account with the initial formula. This can lead to a project that is more than originally calculated. Another problem may be the projects that lasted more years than the initial assessment. The cost will increase due to the length or the excess of costs of the additional time.
An alternative index method is the rentability index. This last formula divides the present value of the actual flows by the cost of a project. Essentially, the rentability index is a hybrid between the index method and the net present value method for project evaluation. The formula increases the present value of the actual input fluxes by the cost of the index method project. This additional step deepened the possible financial returns of a project.
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