Methods for assessing the cost and effectiveness of innovation and innovative projects
Methods for assessing the value and effectiveness of innovation activities overlap with the methods of evaluation used in innovation. However, considering the initially risky nature, the evaluation methods in innovation have their own characteristics.
The effectiveness of innovation is directly related to the total cost of the innovation project. The higher the efficiency, the more expensive the project is.
Consider methods for estimating the value of an innovative company (project).
1. Discounted cash flow method (English Discounted cash flow , DCF ). The company's value is calculated as the sum of the discounted amount of cash flow during the forecast period (i.e., the period before the investor's exit from the business) and the adjusted cash flow in the post-forecast period (terminal value of the company ( CV ), that is, the value of the company at the time of the "exit" of the investor from the business
where NOPLAT - the net operating profit minus the adjusted taxes (in the year following the forecast period); ROIC t - additional income for newly invested capital; g - the expected constant increase in NOPLAT of the company; WACC is the weighted average price of a company's capital.
2. The venture method ( venture capital method , VC ) is an adaptation of the DCF strong> to the early stages of the development of an innovative company. The essence of the method is the forecast of the company's terminal value at the time of "exit", and then its discounting at a high risk rate (usually 60% or more).
3. The contractual method consists in the fact that the value of the organization is determined on the basis of an agreement by mutual agreement of the parties. At the same time, the valuation is performed using a cost approach or is based on the current value of the company's assets. Most often this method of evaluating an innovative company is applied to the "seed" stage.
4. Method of comparable assessments (evaluation by analogy). It is based on a comparison of several key indicators used in valuation of the company ( P/S, P/E , etc.), with indicators of similar organizations operating on the market. Companies for comparison are selected by such criteria as: industry affiliation, growth rate, size. This method is most often used on late stages of the company's development.
5. The real options (English Real options valuation, ROV ). A real option is the right of its owner to buy or sell an asset at any time convenient for him. The method allows to estimate the future potential of the project (not only from an economic point of view, but also from the point of view of the "market perspectivity", the quality of management) and, in addition, using the DCF method, , accordingly, more effectively manage an innovative company or project.
For example, the company is exploring the possibility of acquiring a license to develop gas reserves in this area. Calculations show that the development costs will exceed revenues, respectively, the project will be unprofitable. Nevertheless, gas prices are subject to fluctuations, and after a certain period, the overall result may change. A real option within the framework of this project involves buying a license that will give the right, but it does not oblige us to begin the project implementation under changed conditions.
Types of real options:
- an option to cut and exit from the business (option PUT ) ;
- an option to develop (in the case of a favorable development of events - the option CALL ) ;
- an option that allows you to defer investment for a certain period;
- the option of "growth": initial investments give the right to implement subsequent options, for example, for research and development;
- an option to switch and temporarily stop the business;
- an option to increase or decrease the scale of the project;
- a complex option contains more than one option for implementation (for example, if the company can expand the scope of its activities in favorable conditions, and in an adverse investor has an option to exit).
The principles of accounting for cash flows are the basis of methodological approaches to assessing the effectiveness of innovative projects and innovative activities of enterprises. Both innovative and investment activities are closely related to time factors and discounting. The well-known economic rule that the ruble today is more expensive than the ruble tomorrow, is universally applied here. Accounting for the time factor and risk factors affects investor expectations, type of investment (venture, angel, etc.), investment, etc. Accordingly, the methods and methodological recommendations used in the effectiveness evaluation are related to discounted and discounted estimates.
In the world practice when evaluating and selecting innovative projects for financing and evaluating their effectiveness, the UNIDO methodology is widely used. In addition to this technique, there are other methods, including domestic ones.
The selection of a suitable method is carried out depending on the timing of the project, the size of the investment and other factors.
Consider these methods in more detail.
1. Net present value (present value, NPV ) is the sum of the discounted values calculated (reduced) today. NPV is the difference between the sum of the cash inflows and outflows given to the current day (the valuation date):
where CF t is the payment value in t years; IC - initial investment Invested capital) •, i is the discount rate (1, 2 N).
The discount rate is a variable that depends on several factors. In general, it equates to the percentage of inflation in the country. But in case of consideration of a particular project, this rate is calculated using the formula
where i 1, i 2, ..., i n) is a set of factors that can affect cash flows in the future, within the framework of this innovative project, in particular: i 1 - the refinancing rate, the rate of commercial use, the bank rate on deposits, etc .; i 2 - the level of inflation, etc.
The estimated value of NPV gives an understanding of the effectiveness of the project: if the design coefficient is positive, the project is recognized as effective. And the higher the positive value, the more effective the project.
It is important to understand that for innovative projects, the calculation of financial efficiency alone can give even an approximate picture of their successful development. Too many risky, unforeseen factors occur at each stage. The net discounted income method allows you to estimate only the "monetary", the calculated efficiency.
2. The profitability index (English Profitability index , PI ) is the ratio of the amount of discounted cash flows to the initial investments.
The index is calculated using the formula
where NCF n (English Net cash flow) - discounted cash flows; I - investment.
The profitability index helps to evaluate one of the projects with similar values NPV, but different in the amount of required investments. Accordingly, the project with greater efficiency of investments will be more profitable, the profitability index of which will be higher. There are other names used for PI - the profitability index or profitability index.
3. Internal rate of return (English Internal ) is an interest rate that converts the net present value to zero. Calculated from the equation
IRR is also widely used in assessing the effectiveness of innovative projects as a calculation of the rate of alternative investments.
When evaluating several projects with different IRR , preference is given to the project with a maximum value of 1RR. internal rate of return as the initial stage of quantitative investment analysis, screening out projects that have IRR below 15%. The internal rate of return also has such names as: internal rate of return, internal rate of return, rate of return on investment.
4. Payback period (English Pay-hack period , PBD ) - is the period of time beyond which the net present value becomes greater than zero. The payback period is expressed in the number of months needed to recover the amount of investment in the project. Once again, we emphasize that under the conditions of innovation, none of the above methods can be sufficient to assess the effectiveness of the project. Each method gives only a certain section of the financial analysis of efficiency.
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