What is the Index method?

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Index method is an alternative formula that the company can measure the return rate for specific projects. Many companies use measurement techniques such as pure current value or internal return rate for financial project analysis. The Index method can use the terminal value - the project value at the end of the period - to measure the rate of return. The common formula is the main formula multiplied by one plus the interest rate, the second part of the formula has influenced the number of years for the project. This formula resembles a compound interest formula applied by banks. The whole project should usually be an evaluation based on financial revenues from capital spent on the project. For example, the entire project is $ 150,000 in the US (USD) with a potential interest rate - or capital costs - nine percent and the Tal project for five years. The value of the terminal or the cost of this project is $ 230 at the end of the project. The company would then have to cover these costs through income to make profitu.

Using the Index method for project evaluation is usually a simple process. It also allows companies to assess multiple projects in a short period of time. This allows the company to quickly place the rating on multiple projects and select the most profitable based on the calculated numbers. Another option for this formula is to change the cost of capital from external funds. The change in this number comes from different types of external funds available from creditors and other sources.

The index method is not without its shortcomings. For example, inflation is not taken into account in the initial formula. This can lead to the project more than originally calculated. Another problem may be for several years than originally estimated. The costs will increase as a result of exceeding the length or cost of additional time.

The alternative index method is the profitability index. This latter formula divides current valuesFor cash flows the project costs. The profitability index is essentially a hybrid between the index method and the clean current value for the project evaluation. The formula has the current value of cash flows from income the cost of the project from the Index method. This next step will look deeper at potential financial revenues for the project.