Investment project evaluation criteria
The main criterion for the evaluation of investment projects is the increase in the value of the enterprise, the factors of which are the growth of incomes, the reduction of production or financial risk, the increase in the level of efficiency of the enterprise as a result of making the right decisions.
Determining the reality of achieving exactly such results of investment operations is a key task of evaluating an investment project. The value of the results equally depends on the completeness and reliability of the source data, as well as on the correctness of the methods used in their analysis. The experience and expertise of experts and consultants also play a significant role in ensuring an adequate interpretation of the results of calculations.
Another less important criterion for evaluating investment projects is the evaluation of their effectiveness, which includes two main aspects - financial and economic. The task of the financial evaluation is to establish the sufficiency of the financial resources of the enterprise for the implementation of the project within the prescribed period, the fulfillment of all financial obligations.
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The assessment of economic efficiency consists in determining the potential ability of an investment project to maintain the purchasing value of the invested funds and ensure a sufficient rate of their growth. This analysis is based on the definition of various criteria for the effectiveness of investment projects, which are integral indicators.
Methods for evaluating investment projects
Among the methods existing in the domestic practice for assessing the effectiveness of investment projects can be identified static and dynamic. Static methods are simple to use, but not accurate enough, and are suitable for making decisions on small investment (unit replacement) mainly for small businesses that do not have the time and financial resources to complex calculations. In domestic practice, traditionally, four indicators are used to calculate the effectiveness of capital-forming investments.
1. Comparative efficiency with a limited number of options for capital investments:
where C1 and C2 are the current costs (cost price) for the first and second options; K2 and K1 - capital investments for the second and first options.
2. Estimated costs:
where Сi - current costs (cost price) for i -th option; K. - capital investments for i -th option; Е and the normative coefficient of efficiency of capital investments.
The option with the minimum amount of the reduced costs is chosen.
3. Payback period of capital investments:
where К - capital investments; C1 and C2 - the cost of production before and after capital investments.
4. The overall economic efficiency of capital investments:
where П - annual profit; K - capital investments.
The calculations of the efficiency indicators of capital investments by static methods have a number of significant drawbacks:
- the lack of consideration of the time difference between investing funds and obtaining results;
- the orientation of calculating the main indicators for one year, which reduces its reliability;
- application of the normative coefficient of efficiency of capital investments, focused on average estimates of their profitability, regardless of the specific conditions of investment;
- Absence of inflation accounting;
- the lack of risk and uncertainty in the implementation of investments.
Nevertheless, calculations of these indicators with small amounts of investment and the lack of reliable information, but all stages of their implementation allow you to reject inefficient investments and take fairly correct decisions in a short time.
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