As mentioned earlier, any oil and gas project takes a fairly long period, during which it is exposed to various risks that complicate its implementation.
In practice, the effectiveness of the project depends on the reliability of the prospect determined by the investor. Provided that the deposits of raw materials, the price of raw materials and other types of indicators are incorrectly determined, the project will be highly susceptible to negative factors. Therefore, it is worth introducing a risk management system into your project, which provides a number of advantages, for example, it allows you to more clearly define actions to achieve maximum efficiency, allows you to intelligently assess existing reserves and adequately respond to possible changes in the market.
Currently, there is a scheme for assessing an investment project taking into account risk factors. It consists of six stages:
1. Recruitment of qualified personnel to evaluate the project;
2. Determination of the conditions under which the project is considered effective;
3. Identification of risk factors affecting the project;
4. Allocation of funds taking into account the impact of risk;
5. Cost-benefit analysis taking into account risk;
6. Making a management decision based on the results of the analysis.
At the first stage, investors form a team of specialists, risk managers, investment analysts, etc. This choice is due to the fact that oil and gas projects are implemented in a very difficult internal and external environment; moreover, financial losses from a wrong decision can be enormous, so the presence of highly qualified specialists is necessary.
The second stage is that the values of key indicators that will ensure the effectiveness of the project are determined. Such indicators are: profitability index, rate of return, payback period, income risk level, etc. The level of non-repayable investments is determined for the investor. This is the actual or projected amount of costs that can be assumed for an oil and gas asset that the investor will not be able to return. These investments consist of expenses for the use of subsoil, which is a one-time payment, as well as the costs of acquiring licenses, expenses for participation in a competition (auction), expenses for field exploration, well construction, sanctions, etc.
At the third stage, research is carried out in two directions:
· Analysis of real risks affecting the implementation of the project;
· Analysis of potential risks
A team of selected specialists studies all possible external and internal negative factors, taking into account the type of investment project.
Taking into account the corporate risk management system (RMS), reports and statements are created that reflect the risks, their characteristics and how to deal with them. They are provided in printed or electronic form.
After analyzing the external and internal environments and risk statements, a general group of risk factors is created that affect the project.
This map is built on the basis of qualitative assessments of the results of the impact of risk and the likelihood of a risk event occurring, according to the following principle:
· the x-axis displays qualitative assessments of the magnitude of risk consequences ranging from 1 to 5;
· the y-axis displays qualitative assessments of risk probability ranging from 1 to 5;
· the map is divided into three parts: important risks (red), significant (yellow), insignificant (green).
Based on the results of the risk map, specialists create a risk portfolio.
The results of the analysis serve as the basis for identifying risks that have a strong impact on the future of the project and for identifying the essence of any of the risks, determining the significance at any stage of the project life cycle.
If there are no source data that are reflected in the statements, then analytical reviews, the media, personal experience, etc. are used.
The fourth stage consists of conducting research in three directions:
· Establishing methods for assessing risks and predicting their values;
· Calculation of discount rate;
· Determination of cash flows, taking into account risks.
At this stage, targeted risk assessment methods are determined that take into account the specifics of risks as much as possible.
Next, the discount rate is calculated, which implies an adjustment to the base risk-free discount rate. The calculation is made on a cumulative basis, which takes into account in detail most of the main risks affecting the project.
This stage ends with the calculation of cash flows taking into account the impact of risks.
At the fifth stage, research is carried out in two directions:
· Calculation of performance indicators;
· Evaluation of calculated indicators.
The main indicators are calculated for various project scenarios - P10, Pmean, and P90.
The calculation results are used by comparing different scenarios of a different project with the criteria established by the investor.
The final stage involves constructing a decision matrix.
Quadrants with two conditions for interpreting the obtained assessment results are plotted on the x-axis, and the probability of implementation of each of the scenarios is plotted on the y-axis.
If the results fall into quadrant A, then the analyzed indicators correspond to the criteria established by the investor. If the results fall into quadrant B, then the profitability of the project will not be as expected.
This method of interpreting results based on a decision matrix provides greater opportunities for making management decisions, in contrast to traditional methods. In this case, the results are reliable.
To prevent possible financial losses, investors always conduct a preliminary analysis and assessment of all proposed initiatives. Assessing the economic efficiency of an investment project at the design stage helps to understand its prospects in terms of profitability and profitability, choose the best of several proposed options or determine the order of their implementation.
What is project efficiency and its types
According to many experts and analysts, today there is a huge amount of free money available in the world that can be invested in various endeavors. However, no serious businessman will invest his funds without a thorough and thorough study of efficiency; these are the basics of business.
The effectiveness of a project is understood as the compliance of its final results with the parameters set by the participants in the investment process. In general, the plan of an investment undertaking that claims to be implemented must contain calculations of all possible types of efficiency. Main criteria for evaluating investment projects:
- Overall effectiveness of the project (commercial and socio-economic). This stage determines the extent to which the idea can attract additional participants and sources of funding;
- Efficiency of all participants in the undertaking (taking into account the interests of all partners). These include government bodies, individuals, public organizations, banks, and shareholders. In addition, the participation of large financial and industrial groups, associations, holdings, industry (ministries) and regional structures is possible.
- Budget efficiency. This indicator is considered when budget funds (federal or local) are raised.
Most often, a businessman invests money in a business initiative in order to make a profit by selling the services or goods produced. Regardless of whether the investment is directed to an agricultural enterprise, a shopping center or a steel mill, a commercial assessment is made. Here the decision is made by the entrepreneur based on his own ideas about the prospects of the idea, based on the “benefit-risk” ratio, which is different for everyone.
At the same time, many social facilities are being built in the country that do not bring financial profit. As an example, a hospital built with federal budget funds was put into operation. The peculiarities of evaluating an investment project of this kind are that in the absence of direct profit, the social significance of the constructed object is considered. An assessment of the socio-economic significance of an undertaking, as a rule, is made at the planning stage.
This may include such criteria for assessing effectiveness as improving living conditions for a certain group of people, transport accessibility, and providing them with a number of services (educational, medical, household). Often the social component is contained directly in the business plan.
Example: for employees of an enterprise, provision is made for free housing (or on preferential terms), as well as the construction of household facilities. In this case, the costs of its construction are taken into account in general expenses, and part of the proceeds from the work of household enterprises and partial payment of the cost of housing is included in the income item.
An important aspect is the environmental side of the undertaking; the construction of any facility, especially an industrial one, should not worsen the state of the natural environment. The assessment of this criterion is becoming increasingly important given the tightening of environmental regulations around the world. In addition, national security issues should not be forgotten when exploring new ideas. 
The main investor in initiatives of this kind is usually the state, represented by executive authorities or local government. However, PPPs (public-private partnerships), which use both public and private funds, are also common. Such initiatives must be attractive to all parties.
The budgetary efficiency of the project should be assessed as an increase in the revenue side of the budget and the degree of its excess compared to the expenditure side. In this case, it is necessary to take into account not only direct revenues or reductions in expenses, but also indirect revenues (excise taxes, fees, taxes).
What principles is the assessment based on and why is it carried out?
To avoid distortion of information, especially when comparing several proposals, their analysis and evaluation is carried out according to uniform principles, which are contained in the relevant Methodological Recommendations published by the Russian Academy of Sciences in 2004. If the idea claims to receive state support, then the Methodology is applied, which was approved by order of the Ministry of Regional Development of Russia No. 493 of October 30, 2009.
The basic principles for evaluating investment projects, by which an idea is analyzed and the level of its prospects is determined, include the following points:
- assessment of the project's effectiveness is carried out taking into account its full life cycle, i.e. the entire implementation period, and the multivariate results;
- the relationships between partners and their environment are taken into account;
- modeling of expected cash flows throughout the entire implementation period;
- level of influence on future changes;
- priority of the maximum effect compared to other options, while for the sake of objectivity, all proposals under consideration are placed in comparable conditions;
- accounting for discounting money over time;
- calculation of expected planned costs;
- investment projects are assessed based on the most pessimistic scenario;
- taking into account inflation processes on the cost of resources throughout the implementation of the initiative;
- forecasting possible multifactorial risks on the effectiveness of project implementation;
- taking into account the need for working capital to create production assets.
After conducting a detailed analysis of the effectiveness of investment projects, the most important questions can be answered:
- how profitable is the investment;
- whether the investment will pay off and how quickly;
- whether the risks will exceed the potential profits from the endeavor.
An assessment carried out in compliance with all the above requirements makes it possible to:
- understand how rational the investment is and whether there are necessary conditions for this;
- make investment decisions that are most optimal under the current conditions;
- detect factors that may negatively affect project performance indicators and promptly adjust plans;
- analyze the relationship between profitability and risk parameters;
- draw up an action plan to monitor the rational use of invested funds.
Studying the effectiveness of investment projects is very important in the following cases:
- when searching for main or additional investors;
- when determining the conditions of risk insurance;
- when determining the conditions for obtaining a loan.
If various options for investing money are being considered, then the main criteria make it possible either to cut off the less promising one, or, if the initiatives are not mutually exclusive, to establish a sequence or priority for their implementation.
The investment attractiveness of a project is assessed in a clearly defined sequence. The following stages of assessment are distinguished:
- the overall benefit of its implementation;
- its value for the budget;
- profitability for a private investor.
Let's look at each stage of determining the effectiveness of investment projects in more detail:
- First stage. The procedure for determining the purpose and goals of the initiative. Here the financial viability of the company is examined, an initial study of various risks. The feasibility of attracting additional partners and the degree of attractiveness of the idea for investors are clarified.
- Second phase. Analysis of expected expenses. Activities are carried out aimed at studying investment and production costs, estimate documentation is drawn up, profitability is calculated, and funding is distributed by stages.
- Third stage. Economic assessment of investment projects. First, indicators of social efficiency of project implementation and its impact on the budget are calculated. After this, the effectiveness of the participation of each partner is analyzed, the composition of the people involved and the general financing scheme are determined.
- Fourth stage. Development of a financing strategy. The list of investors and the terms of cooperation with them, the investment scheme, and the calculation of the funds required for each phase of the work are finally determined.
Such expertise applies to all initiatives. All evaluation results obtained must be reflected in the business plan.
Common Valuation Methods
All assessment methods can be divided into static (traditional) and dynamic. They differ in the number of factors taken into account and the complexity of the calculations.
The following indicators can be classified as static.
Payback period (PP). It demonstrates over what period of time the investor will be able to return the invested money and begin to make a profit. Such indicators as the amount of the initial investment (Io) and the average profit over the period of time (CFcr) are taken into account. The general formula is:
Calculation example. New machines worth 20 million rubles were purchased for the plant, which will increase the volume of output by 10%. On average, all additional products are estimated at 6 million rubles per month, and the profit from it is 1.5 million rubles. Thus, we need to find the quotient of the initial investment and the average profit: 20 / 1.5 = 13.3 months. For a more accurate forecast, the indicator can be discounted.
Investment efficiency ratio (ARR). This is the inverse indicator relative to the payback period, i.e. here the average annual net profit is divided by the initial investment.
This is a simple formula that shows the return on investment. It characterizes the ratio of the volume of profit over the entire period of implementation of the idea to the initial investment of capital. Therefore, if the profit was 25 million rubles with an investment of 15 million rubles, then we get a P value of 66 percent. This means that each invested ruble brought 66 kopecks of profit.
A more complex example is the efficiency coefficient itself. Its formula takes into account the residual value of assets after the end of their life cycle (If).
Let's consider the previously discussed example. ARR = 1.5 * 12 / 20 = 0.9 or 90%.
Static ones are simpler to calculate and more visual, but they usually do not take into account the time factor, and incomparable values are often taken for calculation. For this reason, they are usually viewed as auxiliary.
The list of dynamic methods includes a number of indicators that use a larger amount of initial data and also apply a discount rate. There are four main indicators:
Net present value (NPV). Shows the income (CFt) discounted at the rate (r) to the start of implementation, minus the amount of the initial investment (Io).
If it is necessary to additionally inject funds during the implementation of the undertaking, then the formula is slightly modified taking into account the year (Lt) and the investment period (t):
Investment return index (PI). This is an indicator of how much income a unit of investment brought in as a percentage:
This criterion helps to choose a more promising option in cases where the NPV of initiatives is approximately equal. In such a case, a higher PI is preferable if it is greater than or equal to zero.
Internal rate of return (IRR). It signals the rate of return below which the venture will become unprofitable. The indicator does not have its own calculation formula, so most often it is calculated by mathematically selecting the value of the barrier rate based on the value NPV = 0. This can be written as follows:
Here, NPVIRR indicates the net investment value discounted at the IRR.
Discounted payback period (DPP). This takes into account changes in the value of money over time. If money was invested one-time at the very beginning, then the following calculation mechanism is used:
If there is a need for additional funding during the implementation of the undertaking, then the formula looks like this:
In this case, not only income from the sale of products is taken into account, but also the costs of its production.
By applying the methods described above, you can get a complete picture of how beneficial the proposed initiative is. They can be used in full or selectively, based on how complex the economics of the endeavor in question are:
- For small projects, only static methods are often sufficient. Their implementation period is usually short (less than one year), so the discount rate does not play a big role, and the risks are easily predictable.
- Large initiatives, designed for 2-3 years of implementation and a long life cycle, require the use of dynamic methods, and risks are also calculated mathematically.
- Mega-startups with a multi-year implementation period and large financial investments are analyzed according to all criteria in stages: from preliminary studies and modeling to operation and closure. These calculations require special knowledge and experience, so they are carried out by specialized organizations (including scientific ones).
It is especially important to be able to research and calculate risks that may affect the implementation of an idea.
If the risks are poorly studied, large-scale investments can result in colossal losses. The following main types of risks are identified:
- General economic. It is based on the analysis of such indicators as inflation processes, exchange rate fluctuations, and the dynamics of the Central Bank key rate. A large amplitude of fluctuations in these indicators can scare off both foreign and domestic investors.
- Industry. Depends on the level of stability of the industry and the direction of its development, domestic and world prices for products and strategic raw materials. Industry fluctuations are often cyclical, so previous periods are studied to assess future risks.
- Corporate. To understand them, the corporation’s place in the market is studied (economic indicators, share in the output of a particular product, current state of affairs). Typically, such risks are calculated by modeling situations when key performance indicators change.
A timely assessment of the proposed initiative and analysis of the obtained indicators significantly reduces the risk of incurring losses. Therefore, serious entrepreneurs necessarily carry out such work, even if the idea under consideration looks very attractive.
Evaluating the effectiveness of an investment project is carried out in two stages. The effectiveness of an investment project is assessed when developing an investment proposal and declaration of intent, developing a justification for investments, developing a feasibility study and project (technical design), and implementing the project (economic monitoring). The principles for assessing project effectiveness are the same at all stages. At the first stage, indicators of the effectiveness of the project as a whole are calculated, and the social significance of the project is determined. The purpose of this stage is an economic assessment of design solutions and preparation of materials for searching and attracting investors.
The second stage of the assessment is carried out after the development of a financing scheme, with clarification of the composition of participants, and the financial feasibility and effectiveness of the participation of each of them is determined. The essence of assessing the effectiveness of an invested project lies in assessing the social effectiveness and commercial effectiveness of the project. Assessing the social effectiveness of an investment project. When calculating indicators, cash flows reflect the cost assessment of the consequences of implementing this project in other sectors of the economic complex - in the social and economic spheres; working capital includes inventories, unfinished construction products and cash reserves; from the inflows and outflows of money for operating (production) and financial activities, their components associated with obtaining loans, paying interest on them and their repayment, provided subsidies, subsidies, tax and other transfer payments, in which financial resources are transferred from one participant in the project, are excluded to another; manufactured products (work, services) and expended resources are assessed depending on their role in the country's foreign trade turnover, labor costs are assessed by the amount of personnel wages, natural resources used are assessed in accordance with payment rates. When assessing the effectiveness of investment projects, a system of indicators is used, the main of which are: integral effect or net discounted effect, net income, index and rate of return on investment or internal rate of return; need for additional financing, cost and investment return index, payback period. The integral effect (Ei) is the sum of the difference in the results of costs and investments for the calculation period, reduced to one, usually the initial year:
Where Rt is the result in the fth year; 3, - annual costs in the t-th year; K, - investments in the 1st year; Ts( - discount factor; T - billing period. The value of the discount factor (L*) at a constant discount rate (E) is determined by the expression:
With a time-varying discount rate
where Ek is the discount rate in k-tl year.
The above performance measures can be used to measure both social and business performance, as well as shareholder and budgetary performance. When assessing social efficiency, costs and effects must be considered taking into account the interests of the entire society, social and environmental spheres. When assessing commercial efficiency, calculations are made from the position that 100% of investments are made by the owners (shareholders). At the same time, in addition to the cash flows taken into account in the calculations of commercial efficiency, cash flows associated with the receipt and repayment of loans are added. Budgetary efficiency is determined by comparing funds for investments and taxes received by the budget (federal and constituent entities of the Federation) during the implementation of the investment project under consideration. At capital construction enterprises, the economic result (Rt) is taken as revenue from the sale of construction or other products, as well as from the provision of various types of services. Costs (3t) when determining indicators of economic efficiency of investments take into account current costs (without depreciation), taxes and other non-investment expenses.
The integral effect also has other names: net present value (NPV), net present (or net modern) value, Net Present Value (NPV), net effect produced. With a one-time investment in the initial year (Kq), as well as cost results and the discount rate that are constant over time, the integral effect is determined by the expression annual costs.
Where 1C is the annual result;
According to dependencies (5.1) and (5.4), the integral effect over a sufficiently long period is determined. The annual integral effect (Ei) is calculated using the formula
Another indicator of the overall economic efficiency of investments can be the return on investment index (Ek), defined as the ratio of the sum of the reduced difference between results and costs to the amount of capital investments. If capital investments are made over a multi-year period, then they should also be taken in the form of a given amount. In general, the return on investment index is determined by the relationship
The return on investment index is identical to the indicators that have the following names: profitability index (PI), profitability index, Profitability Index. The return on investment index is closely related to the integral effect. If the integral effect of investment Ek is positive, then the profitability index Ek > 1 and vice versa. When Ek > 1, the investment project is considered cost-effective. Otherwise (Ek< 1) проект неэффективен. При инвестициях в исходный год Ко и при постоянных во времени результатах затрат и норме дисконта индекс Рентабельности определяется выражением
The rate of return on investment (E) represents the discount rate at which the value of the reduced difference between the result and costs is equal to the reduced capital investment. The rate of return on investment is found by solving the equation:
The rate of return on investment indicator also has other names: internal rate of return (IRR), internal rate of profit, rate of return on investment, Internal Rate of Return (IRR). The rate of return on investment with Rt - const, 3f = const and one-time capital investments is equal to
The resulting calculated value of E is compared with the rate of return on investment required by the investor. The question of accepting an investment project can be considered if the value of E is not less than the value required by the investor. If the investment project is fully financed by a bank loan, then the value of E indicates the upper limit of the acceptable level of the bank interest rate, exceeding which makes the project economically ineffective. In the case where there is funding from different sources, i.e. both from loans and from own funds, the lower limit of the value of E corresponds to the “price” of the advanced capital, which can be calculated as the weighted average of payments for the use of the advanced capital. At the same time, for loans, the bank rate is taken into account, and for own funds, the planned internal rate of return is taken into account.
How is the effectiveness of an investment project assessed? Why is an investment project being created? Who provides real assistance in assessing investment programs in Moscow?
Hello, dear friends! Denis Kuderin is in touch.
We continue to explore the topic of profitable financial investments. An issue that will be discussed in detail in a new publication is investment projects. I will share with you my personal experience on this issue.
The material will be of interest to both novice businessmen who are planning to open their own business, and experienced investors who want to expand their financial knowledge.
So let's get started!
1. What is an investment project and why is it needed?
The purpose of any monetary investment is to multiply capital. You cannot make a serious profit by investing in the first investment instrument you come across.
It is necessary to carry out preliminary work to justify the economic benefits of investments, determine the term of deposits and their volume, take into account all risks and calculate the profitability of the enterprise. Investment projects are being developed for these purposes.
Investment project– a documentary plan that justifies the feasibility of investing capital in a certain direction. Includes financial calculations, as well as a description of specific steps to implement the investment. A closely related term is business plan.
In the broadest sense of the word, an investment project means any project in which money is invested in order to receive dividends. This could be a small store selling fresh buns, a huge oil refinery, or even a whole city.
However, the subject of our article is private investment projects available to beginning entrepreneurs and existing business structures.
There are several types of such projects:
- production (related to the actual production of goods);
- financial;
- commercial;
- scientific and technical.
Each project is characterized by an individual direction - this could be the creation of new products, cash flow operations, or measures to modernize existing production facilities.
According to the time of their existence, investment projects are divided into:
- long-term (more than 15 years);
- medium-term (5-15 years);
- short-term (up to 5 years).
At the heart of every project is a promising business idea. Further actions are aimed at turning this idea into reality.
Let's consider the main stages of creating investment projects.
Stage 1. Finding an investment idea
Each project is based on a promising commercial idea. No idea, no project. The initiative to create a new source of income can come from a private individual or a legal entity.
Today on the Internet there are special sites - investment project exchanges, where people with money, if desired, can find offers for profitable placement of capital. Projects vary in budget, direction, implementation time and return on investment.
The investment ideas themselves are even more diverse:
- development of the agro-industrial complex in Crimea;
- opening a farm for the production of Jerusalem artichoke;
- creation of solar energy generators in the Sahara Desert;
- launch of a mobile cafe on the city tram platform.
I assure you that the announced projects are not a figment of the author’s imagination, but real ideas from the list of one of the official Russian exchanges.
The likelihood of attracting funds to too exotic projects is, of course, low. Ideas whose essence is clear and understandable to ordinary investors, aimed primarily at long-term profit, have more real chances.
Stage 2. Risk assessment
At this stage, all information regarding the timing of the project, the volume of funds raised, return on investment, and the level of competition is subject to critical analysis.
It is necessary to consider all options for changing the market situation and assess the degree of their impact on profitability.
The purpose of such activities is to determine the risk level of the project, calculate the income and expenses of the future enterprise, and identify the coefficient of the possible influence of subjective and objective factors on the profit.
A competent risk assessment is the main criterion for making a final decision. Carrying out such an analysis makes it clear when and in what volume one should expect a return on the invested capital.
Stage 3. Development of an investment project
At this stage, developers are engaged in an in-depth study of the market niche and collect the maximum amount of information regarding consumer demand for the product that they plan to create.
The prices for similar goods (services, works) from future competitors are necessarily analyzed, and the marketing and economic policies of such companies are clarified. These activities will help assess the viability of the project and determine its prospects.
The main mechanisms for the future implementation of the business plan are also being developed. The number of personnel is calculated, lists of necessary equipment are compiled, and a financial plan is approved.
Stage 4. Coordination and approval of the project
At the fourth stage, investment projects are transformed into full-fledged facilities ready for operation. All that remains is to agree on the business plan with investors and approve it - i.e. conclude an investment agreement and begin work on its implementation.
You must also acquire all licenses and certificates required by law to ensure that your activities are legal.
Stage 5. Project implementation
It's time to turn your plans into reality. Success depends on clear coordination of actions. It is necessary to prepare the premises, purchase equipment, and involve specialists and support staff in the work.
If this is an Internet project, you will need a full-fledged website to work - setting it up and launching it also requires investment and the participation of professional developers.
For clarity, let’s combine the stages of project creation and their characteristics in the table:
| № | Project creation stages | Specific actions | Important nuances |
| 1 | Search for an idea | We are looking for promising business projects | Cost-effective ideas must be based on consumer demand |
| 2 | Risk assessment | We carry out market analysis in the selected niche | If the risk is high, it is better to abandon development and choose another project |
| 3 | Development | The main mechanisms for implementing the business plan are being developed | Be sure to pay attention to the prices of similar products (services) from competitors |
| 4 | Coordination | We prepare documentation | Do not forget to obtain business licenses on time (if necessary) |
| 5 | Implementation | We turn plans into reality | Success depends on a professional and competent approach to business |
3. How to evaluate an investment project - review of the TOP 5 main methods
Assessing the prospects of an investment project allows us to judge its profitability and viability. The financial capabilities of the startup are also checked and the approximate level of future profitability is determined.
There are several methods to determine these parameters.
Conditional selection method
This method of assessment is used when the project is a branch of an already existing enterprise. The new object is conventionally presented as an independent legal entity with its own assets and liabilities.
The methodology evaluates the effectiveness of the project and its financial viability. The only negative is the errors in calculating tax expenses, since they are paid based on the results of the entire enterprise.
Change Analysis Method
This method is used in cases where investments are attracted to expand or modernize existing production.
The purpose of the analysis is to compare the net income of the enterprise with the amount of investment required to change the current state of the company. In fact, only economic efficiency is assessed: real financial profits from modernization cannot be calculated in this way.
The essence of the method is to analyze the financial condition of an enterprise interested in an investment project. The method is convenient for comparable scales of existing production and a new facility.
The size of working capital, the movement of the company’s financial flows are taken into account, and a forecast of the enterprise’s profit is compiled. We must not forget about current loans and debts, otherwise the project assessment will be incorrect.
Overlay method
First, the economic and financial feasibility of the new project is analyzed, after which the results are compared with the existing cash plan of the operating enterprise.
The method allows you to look at an investment project from different points of view, but has a certain degree of convention.
Comparison method
Everything is simple here: the investor compares the current income of an operating enterprise with possible income after the launch of the investment project. The difference will determine the profitability of launching a new facility.
4. How to evaluate the effectiveness of an investment project - step-by-step instructions for beginning businessmen
In this paragraph, I will tell you how to evaluate the effectiveness of private investment startups in practice.
The knowledge gained will help you correctly understand whether the project is worth the money invested and what profits can be expected from it in the future.
Step 1. Pay attention to the uniqueness of the project idea
Unique ideas are not always promising, but they can bring truly worthy profits.
6.2 Stages of assessing the effectiveness of an investment project
The assessment of an investment project is carried out in two stages. At the first stage, an assessment is made and the effectiveness of the project as a whole is determined. At the second stage, the effectiveness of investments is assessed for each individual project participant.
The effectiveness of the project as a whole is assessed at the first stage in order to determine the potential attractiveness of the project for possible participants and to find a source of investment. It includes the social and commercial effectiveness of the project. Social efficiency indicators reflect the balance of benefits and costs for society as a whole. Social efficiency takes into account the costs and results associated with the implementation of the project that go beyond the direct financial interests of the participants in the investment project. Commercial efficiency indicators take into account the ratio of costs and results for an individual participant in an investment project.
For local projects, only commercial effectiveness is assessed. For socially significant projects at the city, regional, etc. level. First of all, their social effectiveness is assessed.
If social efficiency is unsatisfactory, socially significant investment projects cannot qualify for government support and are rejected. If the social effectiveness of the project is high enough, then the commercial effectiveness of the project is assessed. If the commercial effectiveness of such projects is insufficient, the use of various forms of government support is considered.
The differences between assessing public and commercial effectiveness come down to the possibility of attracting grants and subsidies for socially significant projects.
At the second stage, the effectiveness of each participant’s participation in the project is determined. Therefore, at the second stage, significantly more performance indicators are assessed. Thus, financial efficiency is assessed for banks, budget efficiency is assessed for the federal budget, and regional and sectoral efficiency is assessed for the region and industries.
6.3 Methods for analyzing investment projects
To assess the effectiveness of investment projects, simple (statistical) methods and dynamic methods (discounting methods) are used.
Simple methods use methods for calculating the accounting rate of return and payback period. The payback period is the time it takes to return the initial cost of an investment through the income generated. The accounting rate of return is defined as the quotient of the average annual cash inflow divided by the total cash outflow. The disadvantage of indicators with the simple method is their insensitivity to the distribution of cash flows over time. For example, delays in cash receipts will clearly reduce the value of the investment but will not affect the accounting rate of return.
Therefore, dynamic methods are used, in which indicators are calculated taking into account discounting.
The need to calculate the present value of cash is explained by three reasons. First, inflation reduces the purchasing power of money in the future compared to the present. Secondly, the uncertainty associated with receiving money increases more and more. Thirdly, changes in the value of money are associated with the concept of opportunity cost. Opportunity cost is the return that could have been earned by investing that money in something else.
Because the value of money changes over time, it is not possible to simply add up cash flows at different times, as is done when calculating the accounting rate of return. To bring cash flows into line with their changing value, discounting methods are used.
To calculate the discounted or present value of cash flows, use the discount factor (K disk), which is determined by the formula:
K disk = 1/ (1 + r) t,
where r is the discount rate;
t – serial number of the time interval.
The discount rate is generally the rate of return on capital invested, that is, the percentage of profit that the investor wants to receive as a result of the project.
The interest rate chosen for discounting is mainly:
· average deposit rate or lending rate;
· individual rate of return on investments, taking into account the level of risk, inflation and liquidity of investments;
· rate of return for current activities;
· alternative rate of return for other possible types of investments.
Often the discount rate is between the average annual inflation rate (lower limit) and the average annual loan discount rate (upper limit).
6.4 Criteria for assessing the commercial effectiveness of an investment project
There are several indicators for assessing the effectiveness of an investment project. The most commonly used are the following:
net present value
· internal rate of return;
· profitability index;
· discounted payback period of investments.
Assessing the effectiveness of an investment project using the enterprise’s net present value (NPV or NPV) indicator
The enterprise's net income indicator (NPV or NPV) is one of the most frequently used indicators for assessing the effectiveness of an investment project.
An enterprise's net present value from an investment project (NPV) is defined as the difference between the total discounted value of cash receipts and the value of discounted expenses.
In business planning, English terminology is often used. The enterprise's net present value corresponds to NPV (net present value) - net present value. NPV is defined as the difference between the discounted (present) value of cash inflows and the discounted (present) value of cash outflows.
NPV = ∑(П t –З t) x 1 / (1 + r) t - ∑ К t x 1/ (1 + r) t
where P t - revenues from the implementation of the project at the t-time step;
Z t - current costs at t-time step;
K t - capital costs at t-time step;
T - project implementation period (in time intervals).
It should be noted that as the discount rate decreases, the NPV increases.
The criteria for the effectiveness of an investment project are expressed as follows:
if NPV (or NPV) > 0, the project is effective and generates profit in the established amount;
if NPV (or NPV)< 0, проект неэффективен, при заданной норме прибыли приносит убытки;
if NPV (or NPV) = 0, this project will not change the welfare of the enterprise, the enterprise will increase in scale, but will not make a profit.
The higher the NPV, the more effective the project. From several alternative options, the one that brings the highest total income is selected.
Assessing the effectiveness of an investment project using the enterprise’s internal rate of return (IRR or IRR)
The most popular indicator for assessing the effectiveness of an investment project is the internal rate of return (IRR) or IRR (internal rate return).
The internal rate of return (IRR) is the discount rate at which the net present value is zero and all costs are recouped, that is, the critical value of the discount rate at which the NPV changes from positive to negative.
The internal rate of return characterizes the maximum return that can be obtained from a project, that is, the rate of return on invested capital at which the net present value is zero.
If the calculation of the NPV of an investment project gives an answer to the question of whether it is effective or not at a given discount rate, then the IRR is determined in the calculation process itself and then compared with the rate of return on invested capital required by the investor.
The formula for calculating GNI is as follows:
∑ (П t –З t) : (1 - IRR) t = ∑ К t: (1 - IRR) t , with IRR = r and NPV = 0
This equation cannot be solved with multiple cash flows. In practice, the value is calculated using the method of successive approximation using software (iteration method).
if IRR (or IRR) > or equal to the investor’s required rate of return on capital, then the investment project is effective;
if IRR (or IRR)< требуемой инвестором нормы дохода на капитал, то инвестиционный проект неэффективный.
In most cases, if an investment project is considered attractive based on its internal rate of return, then the net present value will also be positive, and vice versa. If a comparison of various options for investment projects in terms of NPV and GNI lead to opposite results, then preference is given to NPV as a more accurate and priority indicator.
Assessing the effectiveness of an investment project using the profitability index (ID or PI)
The profitability index (ID or PI) is the ratio of the difference between discounted income and current costs to the amount of capital investment.
ID = [ ∑ (П t –З t) : ∑ К t ]х1/ (1 + r) t
The criteria for assessing the effectiveness of an investment project are expressed as follows:
if ID > 1 and if NPV > 0, then the investment project is effective;
if ID<1 и если ЧДД < 0 , то проект неэффективный.
Assessing the effectiveness of an investment project using the discounted payback period (or PB) indicator
The discounted payback period of an investment project is the minimum time interval from the start of the project, during which the initial capital costs will be reimbursed by the total results from the project.
The discounted payback period is similar to the simple payback period, but uses the discounted values of all costs and revenues.
None of the above methods by itself is sufficient for project acceptance. Along with the indicators discussed above, other indicators are also determined: break-even points, various financial indicators (liquidity, capital turnover, return on sales, production, etc.).
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