6.3. Economic justification and efficiency of investment projects
As it was said above, realization of any investment project should be preceded by its economic justification, i.e. development of a business plan. When developing the business plan, Methodological recommendations for the evaluation of the effectiveness of investment projects (official publication) approved by the US Department of Economics, the US Department of Treasury, the US State Committee for Building, Architectural and Housing Policy on June 21, 1999, No. VK 477 should be used. >
In these Guidelines there are two types of efficiency: the overall project efficiency and the effectiveness of participation in the project.
The overall efficiency of the project is assessed in order to determine the potential attractiveness of the project, the appropriateness of its adoption by possible participants. It shows the objective acceptability of an investment project in terms of economic efficiency, regardless of the financial capabilities of its participants. When assessing the effectiveness of the project as a whole, its social significance should be taken into account, taking into account the scale of the investment project. The economic, social and environmental consequences of implementing global, economic or large-scale projects affect the whole of society. That is why the effectiveness of the project as a whole is divided into two types: public (socio-economic), the assessment of which is necessary for socially significant projects; commercial, the evaluation of which is carried out for almost all projects under implementation.
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Public efficiency takes into account the social and economic consequences of implementing an investment project for society as a whole, including both the direct costs of the project and the results from the project, and the "externalities" - social, economic, etc.
Commercial efficiency reflects the economic consequences of implementing a project for its participant in the assumption that it independently produces all the necessary costs for the project and enjoys all of its results. In other words, when evaluating commercial efficiency, one should abstract from the capabilities of the project participants in financing the costs of the investment project, conditionally believing that the necessary funds are available.
The effectiveness of participation in the project allows you to assess the feasibility of an investment project taking into account the financial possibilities and interest in it of all its participants. This efficiency can be of several types:
o the effectiveness of the participation of enterprises in the project (its effectiveness for enterprises participating in the investment project);
o the effectiveness of investing in company shares (efficiency for shareholders of the company - participants in the investment project);
o the effectiveness of participation in the project of higher-level structures in relation to enterprises participating in the investment project (economic, regional, sectoral, etc.);
o Budget efficiency of the investment project (efficiency of state participation in the project in terms of expenditures and revenues of budgets of all levels).
General scheme for evaluating the effectiveness of an investment project . First of all, the social significance of the project is determined, and then the efficiency of the investment project is evaluated in two stages.
At the first stage, the project's performance indicators are calculated as a whole.
The second stage is carried out after the development of the financing scheme. At this stage, clarify the composition of participants, determine the financial feasibility and effectiveness of participation in the project of each of them.
There are many methods for assessing the effectiveness of investment projects. Conditionally these methods can be divided into two groups (Figure 6.3): simple, or static; discounted.
Fig. 6.3. Methods for evaluating the effectiveness of an investment project
Simple , or static, methods do not take into account the time value of money and are based on the assumption that the income and expenses due to the implementation of the investment project are of equal importance for different time intervals (calculation steps), during which the effectiveness of the project is evaluated. The most famous simple methods are a simple rate of return and a payback period.
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A simple rate of return is determined by the formula
where Пч - the size of the annual net profit; And - the total value of investment costs.
A simple rate of return is compared with the required rate of return on the investor. If it is higher, it means that the investment project is acceptable (beneficial) for the investor.
Payback period with this method can be calculated as follows:
where P is the net annual cash flow from the realization of the investment project, which consists of the annual amount of profit and depreciation charges (Pv + A); A - the annual amount of depreciation.
Discounted methods are characterized by the fact that they take into account the time value of money.
In the world practice of developed countries, the most widely used method of assessing real investments based on the system of indicators shown in Table. 6.1.
Table 6. 1
Real Investment Valuation Scorecard
Designation in foreign literature
Net present value (RR)
Profitability index (ID)
Internal rate of return (VID)
Discounted payback period (time) (Current)
Net present value is determined by the expression
where Rt - the results (all monetary inflows) achieved at the i-th step of the calculation; 3t - costs (all cash outflows excluding capital investments), carried out at the same step; T - calculation horizon (month, quarter, year); E is the discount rate; К - capital investments necessary for project implementation.
Due to the fact that Ri is all money income (revenue from sales of products, revenue from the sale of obsolete equipment, etc.), and 3t - all costs (costs associated with production and sales of products, tax payments, etc.), then the value (Rt - 3t) is the net profit (Π4t) plus depreciation charges (A (), therefore, the expression
Depreciation charges are added to net profit due to the fact that they remain at the disposal of the enterprise for simple reproduction of fixed assets.
This formula is valid if the discount rate for the entire calculation period is constant.
If the discount rate is not constant (varies from period to period), then the value of pure discounted flow is recommended to be calculated using the formula
Depending on the value of the BHD, a certain investment decision is made.
Rule. If the BHP & gt; 0 - the investment project is profitable. If the HDR & lt; 0 - the project is unprofitable. If the BHP = 0 - the project is neither profitable nor unprofitable. The decision on its implementation is made by the investor.
The greater the value of the BHD, the greater the margin of financial strength is the project, and therefore the smaller risk associated with its implementation.
The BHP and ID criteria are closely interrelated, since they are determined on the basis of the same calculation base.
Yield index is determined by the following formula:
Rule. If the ID & gt; 1 - the project is effective. If the ID & lt; 1 - the project is ineffective. If the ID = 1 - the investor decides to implement the project.
By the internal rate of return is the discount rate value (E) at which the project's HD is zero,
This criterion (indicator) shows the maximum allowable relative level of costs that can be associated with the investment project.
For example, if the project is fully financed by a commercial bank loan, the value of GNI shows the upper limit of the permissible level of the bank interest rate, exceeding which makes the project unprofitable.
In practice, investment projects are financed, as a rule, not from one source, but from several sources, therefore, GNI should be compared with the weighted average price of capital (SS).
Rule. If IRR (IRR) & gt; SS - the project should be accepted. VIEW (IRR) & lt; SS - the project should be rejected. VIEW (IRR) = = CC - project is neither profitable nor unprofitable.
In practice, GNI is usually a method of iterative selection of discount rate values until the BHD becomes 0. This method is laborious enough, therefore, a simplified algorithm for calculating GNI is proposed in the economic literature:
GND (/ AH) = E, for which BHD = f (E) = 0,
where Е1, Е2 - the discount rate at which the value of the BHD is respectively positive and negative; ЧДД1, ЧДД2 - the value of the positive and negative BHD respectively.
Discounted payback period is the time for which receipts from the production activity of an enterprise will cover investment costs. The payback period is measured in years or months.
Applying the payback period as an efficiency criterion is one of the simplest and most widespread methods of economic justification of investments in world practice.
In conditions of high inflation, instability in society and the state, i.e. in the conditions of increased investment risk, the role and value of the payback period as a criterion for the economic justification of investment increases significantly.
But in any situation, the less the payback period, the more attractive this or that investment project.
The general formula for calculating the discounted payback period is:
Example: For the implementation of the investment project, capital investments in the amount of 500 million rubles are required. After the implementation of the investment project, net cash flows by years (P + A) amount to, million rubles:
1st year 150
2nd year 200
3rd year 250
4th year 350
Determine the BHD, ID, VID, Current and on their basis make a conclusion about the economic feasibility of implementing the investment project, if it is known that the discount rate is E = 20%.
Solution. 1. Calculate net present value, million rubles:
2. We calculate the profitability index:
3. Let's find the internal rate of return,%, according to the algorithm
4. Define the payback period, years, using various methodological approaches:
1) excluding discounting of cash receipts:
a) based on the average annual amount of cash receipts
b) based on the increase in cash receipts to achieve capital investment
2) taking into account the discounted cash receipts:
a) based on the average annual amount of cash receipts
b) based on the increase in cash receipts to achieve capital investment
Conclusion. The investment project is economically justified, since all indicators are positive: BHD & gt; 0; ID & gt; 1; IRR & gt; 20%, and the payback period is 3.7 years.
Assessment of the budget efficiency of the investment project. The implementation of any investment project, especially medium and large, positively affects the revenue side of budgets of various levels. And if the state takes part in financing the investment project, this also affects the expenditure side of the budget. In this case, in accordance with the Methodological recommendations to assess the effectiveness of investment projects, it is necessary to determine their budgetary effectiveness.
In accordance with the Methodological recommendations on the evaluation of the effectiveness of investment projects, the main indicator of the rationality of state participation in the project is the indicator of net discounted budget revenue:
where D - budget revenues from the project; E is the discount rate; n is the sequence number of the period; P - budgetary expenses for the project.
The budget includes:
o funds allocated for direct budget financing of the project;
o bank loans for individual project participants, allocated as borrowed funds, subject to compensation from the budget;
o Direct budgetary allocations for surcharges to market prices for fuel and energy;
o payment of benefits for people who are left without work in connection with the project;
o state, regional guarantees of investment risks to foreign and domestic participants; and others
The budget revenues include:
o additionally received tax revenues to the budget of various levels from the implementation of the investment project;
o increase (decrease) in cash receipts from outside enterprises, due to the impact of the project on their financial payments;
o receipt of customs duties and excises in the budget;
o The issue income from the issue of securities for the implementation of the project;
o dividends received and state-owned shares and bonds issued for the purpose of project financing; and others
Along with the HDRs, the indicators of GNIb, IDB and Tpk.b can be used to assess the rational state participation.
Determining the discount rate for the economic justification of investment projects. Determining the discount rate is the most important stage in the process of economic justification of investment projects, since all criteria (NPV, PI, IRR, PP) depend on its value; on the basis of which an investment decision is made. The discount rate depends on many factors: the level of inflation, the magnitude of the investment risk, the interest on the loan, the sources of financing of the investment project, the investor's requirements for efficiency from invested capital, the specifics of the particular enterprise and the particular investment project. It should be avenged that there are no official regulations prescribing the choice of a discount rate. All responsibility for its establishment rests with specialists who carry out the economic justification of investment projects. They must provide a written justification for the selected discount rate.
In the economic literature there are some recommendations for choosing a discount rate. For example, if the investment project is fully financed from own funds, ie. without recourse to other sources, in this case it is recommended that the discount rate be accepted at the level of the requirements of the investor's return on the capital invested by him. It is believed that the investor in this case takes into account all the factors that affect the discount rate.
If the investment project is financed from several sources, the discount rate is determined on the basis of the weighted average price of capital.
So, if the investment project is financed by own and borrowed funds, then the weighted average price of capital
where dc, d3 - the proportion of own and borrowed funds in the total amount of resources allocated for the implementation of the investment project, the proportion of units; Цс, Ц ;, - the price of the capital accordingly own and extra means,%; Ст - the rate under the profit tax, shares of units.
The need for multiplication by the quantity (1 - St) is due to the fact that if interest on a loan is included in the cost of production, then a profit tax benefit is formed, therefore, it must be accounted for in the price of the capital of borrowed funds.
If the investment project is financed only by borrowed funds, the discount rate
Е = Цз (1 - Стм).
From all that has been said, we can conclude that the discount rate should take into account the internal and external factors associated with the implementation of the investment project.
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