Dynamic Methods for Measuring Investment Efficiency
Dynamic methods are based on measuring the results and costs of investment objects with a time factor for the entire investment period. They are based on the use of discount methods. The size of the discount rate used to bring the different costs and results to a single (calculated) time point by determining the discount factor depends on the degree of risk of the project being evaluated and the interest on borrowed capital.
In contrast to static, dynamic methods of investment estimation take into account the investments and receipts that are current for the whole investment period, which differ depending on the moment of their implementation, which are based on the following basic principles and approaches developed in the world practice when assessing the effectiveness of investment projects:
- modeling of product, resource and money flows;
- accounting for the results of market analysis, the financial state of the enterprise claiming to implement the project, the degree of trust in the project managers, the impact of the project on the environment, etc.
- the definition of the effect by comparing the forthcoming integral results and costs with the orientation toward achieving the required rate of return on capital or other indicators;
- bringing the forthcoming different incomes and expenses to the conditions of their commensurability by economic value in the initial period;
- accounting for the impact of inflation, delays in payments and other factors affecting the value of the funds used;
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- accounting for the uncertainty and risks associated with the implementation of the project.
In order to implement these principles for the evaluation of the effectiveness of investment projects, a significant amount of information is required, including the following data:
- estimated project cost determined by analogy methods (if there are analogs), expert estimates;
- information on possible sources and conditions for financing investments made at the stage of pre-investment studies;
- projected volumes of production for the whole life cycle of the project;
- current costs when manufacturing products (providing services) for their life period;
- the dynamics of prices for products (services) for their life cycle on the market;
- the dynamics of the profitability of products (services) for their life cycle on the market;
- information on the impact of the external environment on the performance of the enterprise during the settlement period;
- the factors that determine investment risks, and measures to reduce them;
- justification for the duration of the calculation period, including all stages of the investment project lifecycle.
Bringing forth the incurring incomes and expenses to the conditions of their commensurability in terms of economic value is oriented to the fact that the real value of money is greater than the future one. Therefore, in order to measure the time values, discounting is applied (bringing them to the value of the present moment of time). To bring to the initial moment of time, the discount coefficient ( a i) is used, defined as the inverse of the interest calculation:
where E is the discount rate; i is the step number of the calculation ( i = 0; 1; 2; ...; 7); t is the calculation horizon.
The discount rate ( E ) is the minimum profitable percentage at which the investment project will be profitable. It is set in the process of calculating the effectiveness of the investment project and is guided by the amount of interest on borrowed capital, taking into account the degree of project risk.
In case the investment project is oriented for a long period of time, during which the interest on borrowed capital and the degree of risk can change and, accordingly, the discount rate change, the discount factor in the pre-project period a 0 = 1, and at all other calculation steps is determined by the formula
Using dynamic methods of investment calculations allows you to compare different options for design decisions for the settlement period, taken equal, as a rule, to the investment cycle.
According to the Methodological recommendations, but evaluation of the effectiveness of investment projects and their selection for financing are calculated:
- commercial (financial) efficiency, reflecting the financial consequences of implementing an investment project for its participants;
- budgetary efficiency, characterizing the financial consequences of the project for budgets of all levels;
- the economic efficiency that determines the costs and results associated with the implementation of the project and beyond the direct financial interests of its participants.
The calculation of commercial efficiency is the financial justification for each project under consideration and is determined by the ratio of financial costs and results that ensure the required rate of return. To do this, consider the flow of real money as the difference between their inflow and outflow in three types of activities: investment, operating and financial. The main criterion for the effectiveness of an investment project is the positive balance of accumulated real money in any time interval in which costs are incurred or revenues are generated.
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