Posted on the site 05/14/2009
In the conditions of the world economic crisis construction sector Russian economy is experiencing serious difficulties, in particular, limited access to credit resources. The article considers an example of evaluating the effectiveness of an investment project for the construction of a multifunctional complex.
A.V. Zemtsov, independent expert
Criteria and methods for evaluating investment projects
The financial and economic evaluation of investment projects occupies a central place in the process of substantiating and selecting possible options for investing in transactions with real assets. To a large extent, it is based on project analysis. The purpose of the project analysis is to determine the result (value) of the project. To do this, use the expression:
Project result = project price - project costs.
It is customary to distinguish between technical, financial, commercial, environmental, organizational (institutional), social, economic and other assessments of an investment project.
Predictive assessment of the project is a rather difficult task, which is confirmed by a number of factors:
1) investment expenditures can be made either on a one-time basis or over a sufficiently long period of time;
2) the period of achievement of the results of the implementation of the investment project may be greater than or equal to the calculated one;
3) the implementation of long-term operations leads to an increase in uncertainty in the assessment of all aspects of investments, that is, to an increase in investment risk.
The effectiveness of an investment project is characterized by a system of indicators reflecting the ratio of costs and results, depending on the interests of its participants.
Evaluation of the overall project effectiveness for the investor
Investment projects can be both commercial and non-commercial. Even with non-commercial projects, there are opportunities spent and opportunities received.
The difference between investment projects and current activities is that the costs intended for a one-time acquisition of some opportunities do not apply to investments. It turns out that an investor is a person who invests his opportunities for multiple use, forcing them to work to create new opportunities.
If for commercial projects there are ways to evaluate the effectiveness, then how to evaluate the effectiveness of non-commercial projects? Efficiency is generally understood as the degree of compliance with the goal 1 . The goal should be set precisely, in detail, and allow only an unambiguous answer - whether it has been achieved or not. At the same time, you can achieve the goal in different ways, and each path has its own costs.
To decide on the implementation of a commercial project, its evaluation is carried out. economic efficiency. In the case of a non-commercial project, if it is decided to achieve the goal, then the choice is to determine the most effective way. At the same time, non-financial criteria should take precedence over financial ones. But at the same time, the goal must be achieved in the least costly way.
Also when evaluating a non-commercial project:
Consideration should be given to the stability of the investor to the implementation of the project - whether the investor will withstand the implementation of the project;
When identifying alternatives of equal quality, the cheapest one is usually selected;
It is advisable to plan the movement of costs (investments) in dynamics in order to calculate forces in advance, provide for a deficit and take care of attracting additional resources, if necessary.
Assessment of project externalities
The second aspect of project appraisal is that the project may be of value to more than just the investor. For example, investments in the knowledge of some people brought benefits not to themselves, but to society as a whole, which then used the discoveries and inventions of scientists for their own needs. Ordinary commercial investment projects of companies, in addition to commercial significance, also have the following effects:
Social;
tax;
Budget;
Ecological.
All effects of the project are important for other parties, as the company and the project are surrounded by society, people, the state, and nature. If the project improves the environment, then it is better for the company implementing the project, because everything in the world is interconnected.
1. The social effect is assessed by the benefits of the project for the population, either living around the project site or working on the project, and consists of:
In raising the level of salaries;
Development of infrastructure and other opportunities for the population around the project site.
2. The tax effect is estimated by the volume of taxes collected from the project to the local, regional and federal budget.
3. The budget effect is assessed if the project is fully or partially financed from the budget (federal, regional, local). It is determined how much money the project returns to the budget through taxes, after the budget has invested in the project, over a certain number of years.
4. An environmental effect takes place if the project in one way or another affects the ecological situation.
Economic approach in evaluating the effectiveness of an investment project
The vast majority of decisions made by market economy entities are based on a preliminary assessment of the expected consequences. An individual assessment of the acceptability (efficiency, value) of each investment project is carried out using various methods and taking into account certain criteria. We have analyzed Russian and foreign methods for evaluating investment projects and practical examples the application of these methods is shown.
General approaches to determining the effectiveness of investment projects
Investment decision-making is based on the assessment of the economic efficiency of investments. Market economy requires taking into account the impact on the efficiency of investment activity of environmental factors and the time factor, which are not fully evaluated in the calculation of these indicators.
They quite fully reflect the results of scientific research by domestic and foreign economists in the field of methods for evaluating efficiency. The performance indicators of investment projects according to the Methodological recommendations are divided into the following types 3:
Commercial performance indicators that take into account the financial implications of the project implementation for its direct participants;
Budget performance indicators reflecting the financial impact of the project on the federal, regional or local budgets;
Economic efficiency indicators that take into account the results and costs associated with the implementation of an investment project, which go beyond the direct financial interests of the project participants and allow for cost measurement.
The allocation of such types is artificial and is associated with the definition of a single indicator of economic efficiency, but in relation to different objects and levels economic system: national economy in general (global criterion of economic efficiency), regional, sectoral, enterprise level or a specific investment project.
According to methodological recommendations, the effectiveness of investments is characterized by a system of indicators that reflect the ratio of costs and results associated with investments and make it possible to judge the economic advantages of some investments over others.
Investment performance indicators can be classified according to the following criteria 4:
1) by the type of generalizing indicator, which acts as a criterion for the economic efficiency of investments:
Absolute, in which generalizing indicators are defined as the difference between the cost estimates of the results and costs associated with the implementation of the project;
Relative, in which generalizing indicators are defined as the ratio of cost estimates of project results to the total costs of obtaining them;
Temporary, which evaluates the payback period investment costs;
2) according to the method of comparing multi-time cash costs and results:
Static, in which cash flows arising at different points in time are evaluated as equivalent;
Dynamic, in which the cash flows caused by the implementation of the project are reduced to an equivalent basis by discounting them, ensuring the comparability of different times cash flows.
Static Methods are also called methods based on accounting estimates, and dynamic methods - methods based on discounted estimates 5 .
To group of static include methods: payback period of investment (Payback Period, PP); investment efficiency ratio (Accounting Rate of Return, ARR).
To dynamic methods include: net present value, net present value (Net Present Value, NPV); return on investment index (Profitability Index, PI); internal norm profitability (Internal Rate of Return, IRR); modified internal rate of return (Modified Internal Rate of Return, MIRR), discounted payback period of the investment (Discounted Payback Period, DPP).
It should also be noted that the evaluation of the effectiveness of each investment project is carried out taking into account criteria that meet certain principles, namely:
Effects of the value of money over time;
opportunity cost;
Possible changes in project parameters;
Carrying out calculations based on a real flow Money, not accounting indicators;
Inflation and its reflection;
The risk associated with the implementation of the project.
Let us consider the main methods for evaluating the effectiveness of investment projects in more detail and find out their main advantages and disadvantages.
Static evaluation methods
Payback Period (PP)
The most common static indicator for evaluating investment projects is the term payback (Payback Period, PP).
The payback period is understood as the period of time from the start of the project until the operation of the facility, when the income from operation becomes equal to the initial investment (capital costs and operating costs).
This indicator gives an answer to the question: when will the full return on invested capital occur? The economic meaning of the indicator is to determine the period for which the investor can return the invested capital.
To calculate the payback period, the elements of the payment series are summed up on an accrual basis, forming the balance of the accumulated flow, until the amount takes a positive value. The serial number of the planning interval, in which the balance of the accumulated flow takes a positive value, indicates the payback period, expressed in planning intervals. The general formula for calculating the PP indicator is as follows:
where P k is the value of the accumulated flow balance;
I 0 - the value of the initial investment.
When a fractional number is received, it is rounded up to the nearest whole number. Often, the PP indicator is calculated more accurately, that is, the fractional part of the interval (billing period) is also considered; at the same time, it is assumed that within one step (calculated period), the balance of accumulated cash flow changes linearly. Then the "distance" x from the beginning of the step to the moment of payback (expressed in the duration of the calculation step) is determined by the formula:
where P k- is the negative value of the balance of the accumulated flow at the step up to the payback moment;
P k+ is a positive value of the balance of the accumulated flow at the step after the payback moment.
As a measuring instrument, the "payback period" criterion is simple and easy to understand. However, it has significant disadvantages, which we will consider in more detail when analyzing the discounted payback period (DPP), since these disadvantages apply to both static and dynamic payback period indicators. The main drawback of the static indicator "payback period" is that it does not take into account the time value of money, that is, it does not distinguish between projects with the same balance of the income stream, but with a different distribution over the years.
Investment efficiency ratio (Accounting Rate of Return, ARR)
Another indicator of static financial evaluation project is the investment efficiency ratio (Account Rate of Return or ARR). This ratio is also called the accounting rate of return or the profitability ratio of the project.
There are several algorithms for calculating ARR.
The first calculation option is based on the ratio of the average annual profit (minus deductions to the budget) from the implementation of the project for the period to the average investment:
I av 0 - the average value of the initial investment, if it is assumed that after the expiration of the project, all capital costs will be written off.
Sometimes the profitability of the project is calculated based on the initial investment:
Calculated on the basis of the initial investment, it can be used for projects that create a stream of uniform income (for example, an annuity), for an indefinite or sufficiently long period.
The second calculation option is based on the ratio of the average annual profit (minus deductions to the budget) from the implementation of the project for the period to the average investment, taking into account the residual or salvage value initial investment (for example, taking into account the salvage value of equipment at the end of the project):
where R r — annual average profits (minus deductions to the budget) from the implementation of the project;
I 0 - the average value (value) of the initial investment.
Dynamic evaluation methods
Net present value (Net Present Value, NPV)
In modern published works, the following terms are used to name the criterion of this method: net present value 6 ; net present income 7 ; net present value 8 ; net present value 9 ; overall financial result from the implementation of the project 10 ; present value 11 .
The amount of net present value (NPV) is calculated as the difference between the discounted cash flows of income and expenses incurred in the process of implementing the investment over the forecast period.
The essence of the criterion is to compare present value future cash receipts from the implementation of the project with the investment costs necessary for its implementation.
The application of the method involves the sequential passage of the following stages:
1) calculation of the cash flow of the investment project;
2) the choice of a discount rate that takes into account the profitability of alternative investments and the risk of the project;
3) determination of net present value.
NPV or NPV for a constant discount rate and a one-time initial investment is determined by the following formula:
where I 0 - the value of the initial investment;
i - discount rate.
Cash flows must be calculated at current or deflated prices. When forecasting income by years, it is necessary, if possible, to take into account all types of receipts, both production and non-production nature, which can be associated with this project. So, if at the end of the project implementation period it is planned to receive funds in the form of the salvage value of equipment or the release of part working capital, they should be accounted for as income of the respective periods.
This method is based on the premise that the value of money varies over time. The process of converting the future value of a cash flow into a current value is called discounting(from English. discount- decrease).
The rate at which discounting takes place is called the rate. discounting (discount), and the factor F = 1/(1 + i) t is discount factor.
If the project involves not a one-time investment, but a consistent investment of financial resources over a number of years, then the formula for calculating NPV is modified in the following way:
where I t is the cash flow of the initial investment;
C t - cash flow from the sale of investments at time t;
t is the calculation step (year, quarter, month, etc.);
i - discount rate.
Terms of acceptance investment decision based on this criterion are reduced to the following:
If NPV > 0, then the project should be accepted;
If NPV< 0, то проект принимать не следует;
If NPV = 0, then the adoption of the project will bring neither profit nor loss.
This method is based on following the main target setting, determined by the investor, - maximizing its end state or increasing the value of the firm. Following this target setting is one of the conditions for a comparative evaluation of investments based on this criterion.
The negative value of the net present value indicates the inexpediency of making decisions on financing and implementing the project, since if NPV< 0, то в случае принятия проекта ценность компании уменьшится, то есть владельцы компании понесут убыток и основная целевая установка не выполнится.
A positive value of the net present value indicates the feasibility of making decisions on financing and implementing the project, and when comparing investment options, the option with the highest NPV is considered preferable, because if NPV > 0, then if the project is accepted, the value of the company, and hence the well-being of its owners will increase. If NPV = 0, then the project should be accepted provided that its implementation will increase the flow of income from previously implemented capital investment projects. For example, the extension land plot for the hotel car park will boost the real estate income stream.
The implementation of this method involves a number of assumptions that need to be checked for the degree of their correspondence to reality and for what results possible deviations lead to.
Such assumptions include:
The existence of only one objective function - the cost of capital;
The specified period for the implementation of the project;
Data reliability;
Belonging of payments to certain points in time;
The existence of a perfect capital market.
When making decisions in investment sphere often you have to deal not with one goal, but with several target settings. In the case of using the method of determining the cost of capital, these objectives should be taken into account when finding a solution outside the process of calculating the cost of capital. At the same time, methods for making multi-purpose decisions can also be analyzed.
The useful life should be established in the performance analysis before applying the net present value method. To this end, methods for determining the optimal service life can be analyzed, unless it is established in advance for technical or legal reasons.
In reality, when making investment decisions, there is no reliable data. Therefore, along with the proposed method for calculating the cost of capital based on predicted data, it is necessary to analyze the degree of uncertainty, according to at least- for the most important investment objects. This purpose is served by methods of investing in conditions of uncertainty.
When forming and analyzing the method, it is assumed that all payments can be attributed to certain points in time. The time interval between payments is usually one year. In fact, payments can be made at shorter intervals. In this case, you should pay attention to the compliance of the settlement period step (calculation step) with the condition for granting a loan. For the correct application of this method, it is necessary that the calculation step be equal to or a multiple of the term for calculating interest on the loan.
Also problematic is the assumption of a perfect capital market, in which financial resources can be attracted or invested at a single calculated interest rate at any time and in unlimited quantities. In reality, there is no such market, and interest rates for investing and borrowing financial resources usually differ from each other. As a result, there is a problem of determining the appropriate interest rate. This is especially important as it has a significant impact on the cost of capital.
When calculating NPV, different discount rates can be used over the years. In this case, it is necessary to apply individual discount factors to each cash flow, which will correspond to this calculation step. In addition, it is possible that a project that is acceptable at a constant discount rate may become unacceptable at a variable one.
The net present value indicator takes into account the time value of money, has clear decision criteria and allows you to select projects to maximize the value of the company. In addition, this indicator is absolute and has the property of additivity, which makes it possible to add up the indicator values for various projects and use the total indicator for projects in order to optimize the investment portfolio, that is, the following equality is true:
NPV A + NPV B = NPV MB .
With all its advantages, the method also has significant disadvantages. Due to the difficulty and ambiguity of forecasting and generating cash flow from investments, as well as the problem of choosing a discount rate, there may be a danger of underestimating the risk of a project.
Profitability Index (PI)
The profitability index (profitability, profitability) is calculated as the ratio of the net present value of cash inflow to the net present value of cash outflow (including initial investment):
where I 0 is the investment of the enterprise at time 0;
i - discount rate.
The profitability index is a relative indicator of the effectiveness of an investment project and characterizes the level of income per unit of costs, that is, the effectiveness of investments - the higher the value of this indicator, the higher the return monetary unit invested in this project. This indicator should be preferred when completing an investment portfolio in order to maximize the total value of NPV.
The conditions for accepting a project under this investment criterion are as follows:
If PI > 1, then the project should be accepted;
If PI< 1, то проект следует отвергнуть;
If PI = 1, the project is neither profitable nor unprofitable. It is easy to see that when evaluating projects involving the same amount of initial investment, the PI criterion is fully consistent with the NPV criterion.
Thus, the PI criterion has an advantage when choosing one project from a number of projects with approximately the same NPV values, but different amounts of required investments. In this case, the one that provides greater efficiency of investments is more profitable. In this regard, this indicator allows you to rank projects with limited investment resources.
The disadvantages of the method include its ambiguity when discounting cash inflows and outflows separately.
Internal Rate of Return (IRR)
Under internal rate of return, or the internal rate of return, investment (IRR) understand the value of the discount rate at which the NPV of the project is zero:
IRR = i, where NPV = f(i) = 0.
The meaning of calculating this coefficient when analyzing the effectiveness of planned investments is as follows: The IRR indicates the maximum allowable relative level of expenditure that can be associated with a given project. For example, if the project is financed entirely by a loan commercial bank, then the IRR value shows the upper limit of the acceptable level of the bank interest rate, the excess of which makes the project unprofitable.
In practice, any enterprise finances its activities from various sources. As a payment for the use of financial resources advanced to the activities of the enterprise, it pays interest, dividends, remuneration, etc., that is, it bears some reasonable expenses to maintain its economic potential. An indicator characterizing the relative level of these incomes can be called the price of advanced capital (capital cost, CC). This indicator reflects the minimum return on the capital invested in its activities, its profitability, which has developed at the enterprise, and is calculated using the arithmetic weighted average formula.
The economic meaning of this indicator is as follows: an enterprise can make any investment decisions, the level of profitability of which is not lower than the current value of the CC indicator (price of the source of funds for this project). It is with him that the IRR indicator calculated for a specific project is compared, while the relationship between them is as follows:
If IRR > СС, then the project should be accepted;
If IRR< СС, то проект следует отвергнуть;
0 if IRR = СС, then the project is neither profitable nor unprofitable.
Another interpretation is to interpret the internal rate of return as a possible discount rate at which the project is still profitable according to the NPV criterion. The decision is made on the basis of comparing the IRR with the standard profitability; at the same time, the higher the values of the internal rate of return and the greater the difference between its value and the selected discount rate, the greater the safety margin of the project. This criterion is the main guideline in making an investment decision by an investor, which does not detract from the role of other criteria. To calculate IRR using discount tables, two values of the discount factor r are selected< i 2 таким образом, чтобы в интервале (i, …, i 2) функция NPV = f(i) меняла свое значение с «+» на «-» или с «-» на «+». Далее применяют формулу:
where r 1 is the value of the discount factor at which f (i 1) > 0 (f (i 1)< 0);
r 2 - the value of the discount factor at which f (i 1)< 0 (f (i 1) > 0).
The accuracy of the calculations is inversely proportional to the length of the interval (i 1 , ..., i 2), and the best approximation is achieved when i 1 and i 2 are the nearest to each other values of the discount coefficient that satisfy the conditions.
An accurate calculation of the IRR value is possible only with the help of a computer.
The corresponding assumption of the method of determining the internal rate (investment at the internal interest rate) is generally not appropriate. Therefore, the method of determining the internal rate of return without taking into account specific reserve investments or other modification of conditions should not be used to assess absolute profitability if complex investments are taking place and thereby a reinvestment process occurs. With this type of investment, there is also the problem of the existence of several positive or negative internal interest rates, which can lead to difficulties in interpreting the results obtained by the method of determining the internal rate of return.
The method of determining the internal rate of return for assessing relative profitability should not be applied, as noted above, by comparing the internal interest rates of individual objects. Instead, the investment must be analyzed to determine the difference. If a we are talking about investments made in isolation, the internal interest rate can be compared with the estimated rate to make comparisons possible. If investments for comparing profitability are complex, then the use of the method of determining profitability is inappropriate.
The advantage of the internal rate of return method in relation to the net present value method is the possibility of its interpretation. It characterizes the accrual of interest on the capital expended (return on capital employed).
In addition, the internal interest rate can be considered as a critical interest rate for determining the absolute profitability of an investment alternative if the net present value method is applied and the assumption of “reliable data” does not apply.
Thus, the evaluation of investments using this method is based on determining the maximum value of the discount rate at which projects will break even.
The NPV, IRR and PI criteria most commonly used in investment analysis, are actually different versions of the same concept, and therefore their results are related to each other. Thus, we can expect the following mathematical relationships to be fulfilled for one project:
If NPV > 0, then IRR > CC(r); PI > 1;
If NPV< 0, то IRR < CC (r); PI < 1;
If NPV = 0, then IRR = CC(r); PI = 1.
There are techniques that adjust the IRR method for application in a particular non-standard situation. One of these methods is the modified internal rate of return (MIRR) method.
Modified Internal Rate of Return (MIRR)
Modified rate of return (MIRR) eliminates a significant drawback of the internal rate of return of the project, which occurs in the case of repeated cash outflows. An example of such repeated outflows is an installment purchase or construction of a property over several years. The main difference of this method is that reinvestment is carried out at a risk-free rate, the value of which is determined based on the analysis financial market.
In Russian practice, this can be the yield of a term currency deposit offered by Sberbank of Russia. In each case, the analyst determines the risk-free rate individually, but, as a rule, its level is relatively low.
Thus, discounting costs at a risk-free rate makes it possible to calculate their total present value, the value of which allows a more objective assessment of the level of investment return, and is a more correct method in case of making investment decisions with irrelevant (extraordinary) cash flows.
Discounted Payback Period (DPP)
Discounted payback period of investment (Discounted Payback Period, DPP) eliminates the disadvantage of the static payback method and takes into account the time value of money, and the corresponding formula for calculating the discounted payback period, DPP, is:
Obviously, in the case of discounting, the payback period increases, that is, always DPP > PP.
The simplest calculations show that such a technique, under conditions of a low discount rate, which is characteristic of a stable Western economy, improves the result by an imperceptible amount, but for significantly higher rate discounting characteristic of the Russian economy, this gives a significant change in the calculated value of the payback period. In other words, a project that is acceptable under the PP criterion may not be acceptable under the DPP criterion.
When using the PP and DPP criteria in the evaluation of investment projects, decisions can be made based on the following conditions:
a) the project is accepted if the payback takes place;
b) the project is accepted only if the payback period does not exceed the deadline set for a particular company.
In general, the definition of the payback period is of an auxiliary nature with respect to the net present value of the project or the internal rate of return. In addition, the disadvantage of such an indicator as the payback period is that it does not take into account subsequent cash inflows, and therefore may serve as an incorrect criterion for the attractiveness of the project.
Another significant drawback of the "payback period" criterion is that, unlike the NPV indicator, it does not have the property of additivity. In this regard, when considering a combination of projects, this indicator must be handled with care, given this property.
However, the "payback period" criterion is indifferent to the amount of initial investment and does not take into account the absolute volume of investments. Thus, this indicator can only be used to analyze investments with a comparable amount of initial investment.
In some cases, the application of the "payback period" criterion can be decisive for the purposes of making investment decisions. In particular, this can happen if the investment is associated with high risk, and then the shorter the payback period, the more preferable such a project. In addition, the management of the company may have a certain limit on the payback period, and this is primarily due to the problem of liquidity, since the main task of the company is to ensure that investments pay off as soon as possible. Thus, the PP and DPP criteria make it possible to judge the liquidity and riskiness of the project as follows: the shorter the payback period, the less risky the project; the more liquid the project, which has a shorter payback period. It is advisable to apply these criteria when a company is interested in increasing liquidity, as well as in industries where investments are associated with high level risk (for example, in industries with a rapid change in technology: computer systems, mobile connection etc.).
Cash flows of investment projects: analysis and evaluation
Relevant cash flows
The most important step in the analysis of an investment project is the assessment of the projected cash flow 12 , consisting (in the most general view) from two elements: required investments (outflows of funds) and cash inflows minus current expenses (inflows of funds).
Financial analysis must carefully consider the distribution of cash flows over time. Financial statements The income statement is not linked to cash flows and therefore does not reflect when exactly during the reporting period there is an inflow or outflow of cash.
When designing cash flow, the time value of money must be taken into account.
To compare multi-temporal values of the cash flow, a discounting mechanism is used, with the help of which all values of the cash flow at various stages of the implementation of the investment project are brought to a certain moment, called the reduction moment. Usually, the moment of reduction coincides with the beginning or end of the basic stage of the investment project, but this is not prerequisite, and any stage at which it is required to evaluate the effectiveness of the project can be chosen as the reduction point.
As noted above, the most important indicator project efficiency is the net present value. The indicators of net present value and internal rate of return (IRR) make it possible to compare various investment projects with each other in order to choose the most effective one. However, projects with comparable implementation timelines, initial investment volumes and relevant cash flows are subject to such a comparison.
Relevant cash flows are those in which a minus-signed flow changes to a plus-signed flow once. Relevant cash flows are characteristic of standard, typical and most simple investment projects in which the initial investment of capital, that is, the outflow of funds, is followed by long-term receipts, that is, the inflow of funds.
Analysis of the cash flow of an investment project is not limited to studying its structure. It is also important to identify the cash flow, make sure it is relevant/irrelevant, which will ultimately simplify the selection of evaluation indicators and selection criteria, as well as improve comparability. various projects.
Irrelevant Cash Flows
Irrelevant cash flows are characterized by a situation where the outflow and inflow of capital alternate. In this case, some of the considered analytical indicators with a change in the initial parameters may change in an unexpected direction, that is, the conclusions drawn on their basis may not always be correct.
If we recall that IRR is the root of the equation NPV = 0 and the function NPV = f(i) is the algebraic equation k-th degree, where k is the number of years of project implementation, then, depending on the combination of signs and absolute values of the coefficients, the number of positive roots of the equation can vary from 0 to k. In particular, if the values of the cash flow alternate in sign, several values of the IRR criterion are possible.
If we consider the graph of the function NPV \u003d f (r, Pk), then its different presentation is possible depending on the values of the discount factor and signs of cash flows ("plus" or "minus"). Two most realistic typical situations can be distinguished (Fig. 1).
Reduced types of function graph
NPV = f (r, Pk) correspond to the following situations:
Option 1 - there is an initial investment of capital with subsequent cash inflows;
Option 2 - there is an initial investment of capital, in subsequent years, inflows and outflows of capital alternate.
The first situation is the most typical: it shows that the function NPV = f (r) in this case is decreasing as r increases and has a single value of IRR. For the second situation, the type of graph may be different.
Project efficiency assessment
Consider an example of evaluating an investment project for the construction of a multifunctional complex within the third transport ring.
Assumptions
Any investment project is considered in the context of complex macro- and microeconomic processes. The process of modeling and evaluating an investment project is influenced by many, if not all, factors of the macro- and microenvironment, as far as it is concerned. real investment in the construction industry, which will be discussed. Absolutely everything is impossible to take into account, but there are indicators that can and even need to be taken into account: inflation, interest rate commercial loan, the share of the fund's profit, taxes, the desired profit of the investor and others. It is easy to see that some indicators, such as inflation and taxes, are conditionally constant, that is, their quantitative characteristics can be taken as constant over a certain period of time. Others, like the commercial loan rate, the fund's profit share, the investor's desired return, and others, may vary depending on the "appetite" of the participants. To analyze the effectiveness of the proposed investment project, a model was created in which it is possible to change the above indicators, and the computer automatically recalculates the analytical part, but for this study it is necessary to fix some indicators in the form of economic assumptions 13:
Interest rate bank loan, 27% per annum;
Bank profit share, 0%;
Profit of the right holder, 84%;
Income tax rate, 24%;
Development fee, 3% of revenue;
Marketing costs, from revenue 2%;
Cost of land lease, $91,000/ha per year;
Fixed part of running costs, $15,000 per month.
In addition to the above assumptions, it is worth saying that there are several strategies for the development of the proposed investment project. In order to minimize the risks and a faster return on investment, we propose to consider the situation of financing the project at the expense of 100% of the funds raised, with the parallel sale of the areas under construction as they are built.
Research Logic
To determine investment needs, as well as to analyze the economic efficiency of an investment project, it is necessary to go through several 14 stages:
1) investment forecasting: project estimate;
2) investment forecasting: investment plan;
3) revenue forecast;
4) drawing up a cash flow statement;
5) determination of net present value (NPV) and internal rate of return (IRR);
6) calculation of the payback period of investments (PP), discounted payback period (DPP) and investment profitability index (PI);
7) determination of the need for financing.
Let's take a closer look at the key points.
Description of the investment project
Consider an investment project for the construction of a multifunctional complex within the third transport ring, which is a multi-storey complex on an area of 1.08 hectares with underground parking, offices, retail space, a hotel, a restaurant and apartments.
Evaluation of the effectiveness of the project. Investment Forecasting: Project Estimate
Consider specific example evaluating the effectiveness of an investment project for the construction of a multifunctional complex in Moscow. We will draw up a project estimate (Table 1).
Preparation of a cash flow statement
Determination of Net Present Value (NPV)
To determine the NPV, the line profit / loss (or cash flow) is taken from the cash flow statement. For clarity, we present a method for calculating NPV.
Calculation of NPV:
conclusions
In the context of the global economic crisis, the construction sector of the Russian economy is experiencing serious difficulties, in particular, access to credit resources is limited even for such large companies like Mirax Group, PIK group of companies, Glavmosstroy. Almost all developers now have to rely solely on own funds, which are basically not enough for the implementation of new and completion of existing projects, not to mention those companies that were building exclusively on borrowed funds.
Nevertheless, promising investment projects continue to exist on the market, and the use of the correct methodology for their assessment is still relevant. At the same time, it is necessary, of course, to make adjustments to the values of current indicators for the cost of credit resources, the exchange rate, the discount rate and other indicators, to modernize the general approach to the formation of project financing sources.
Table 1. Project estimate
Table 2. Cash flow statement
| Cash flow statement | ||||||||
| 1st year | 2nd year | |||||||
| I | II | III | IV | I | II | III | IV | |
| Revenue | ||||||||
| Sale of hotel space | $239 200 000 | |||||||
| Sale of apartments | $54 000 000 | $54 000 000 | $54 000 000 | $54 000 000 | $54 000 000 | $54 000 000 | $54 000 000 | |
| Sale of parking spaces | $17 460 000 | $17 460 000 | $17 460 000 | $17 460 000 | ||||
| Sale of restaurant space | $23 700 000 | |||||||
| Sale of retail space | $3 760 000 | $3 760 000 | $3 760 000 | |||||
| Sale of office space | $5 460 000 | $5 460 000 | $5 460 000 | |||||
| Selling costs | $ (2 143 800) | $ (8 908 800) | $ (2 420 400) | $ (2 607 600) | $ (2 307 600) | $ (1 620 000) | $ (2 143 800) | |
| Net revenue | $69 316 200 | $288 051 200 | $78 259 600 | $84 312 400 | $74 612 400 | $52 380 000 | $69 316 200 | |
| Expenses | ||||||||
| Preparation of a package of documents | $125 598 000 | |||||||
| Construction of hotel areas | $15 946 667 | $15 946 667 | $15 946 667 | |||||
| Construction of apartments | $16 800 000 | $16 800 000 | $16 800 000 | |||||
| Construction of a parking lot | $55 500 000 | |||||||
| Restaurant area construction | $7 900 000 | |||||||
| Construction of retail space | $3 760 000 | |||||||
| Construction of office space | $4 680 000 | |||||||
| Construction of technical premises | $750 000 | $750 000 | $750 000 | $750 000 | $750 000 | $750 000 | $750 000 | $750 000 |
| Preparation for finishing | $628 857 | $628 857 | $628 857 | $628 857 | $628 857 | $628 857 | $628 857 | |
| Finishing of technical premises | $187 500 | $187 500 | $187 500 | $187 500 | $187 500 | $187 500 | $187 500 | $187 500 |
| Finishing of general office and retail space | $1 600 000 | |||||||
| Parking lot decoration | $436 500 | $436 500 | ||||||
| Showroom organization | $900 000 | |||||||
| Marketing costs | $1 386 324 | $5 761 024 | $1 565 192 | $1 686 248 | $1 492 248 | $1 047 600 | $1 386 324 | |
| Getting BTI | $4 402 000 | |||||||
| Current expenses | $15 000 | $15 000 | $15 000 | $15 000 | $15 000 | $15 000 | $15 000 | $15 000 |
| Development Fee | $5 474 610 | $908 725 | $698 671 | $572 796 | $602 028 | $596 208 | $582 869 | $458 090 |
| Interest on borrowed funds | $12 687 409 | $11 115 643 | - | - | - | - | - | |
| Total expenses | $187 961 610 | $46 030 782 | $44 012 162 | $22 086 412 | $23 277 233 | $22 777 413 | $21 631 826 | $17 871 572 |
| $385 649 010 | ||||||||
| Total interest paid | $23 803 052 | |||||||
| Profit Loss | $(187 961 610) | $23 285 418 | $244 039 038 | $56 173 188 | $61 035 167 | $51 834 987 | $30 748 174 | $51 444 628 |
| Cumulative total | $(187 961 610) | $(164 676 192) | $79 362 846 | $135 536 034 | $196 571 200 | $248 406 187 | $279 154 361 | $330 598 990 |
1 - Zlaf V. Evaluation of non-commercial investment projects // New markets. 2002. No. 3.
3 - Zavlin P.N. Estimation of economic efficiency of investment projects: Modern approaches. - St. Petersburg: Nauka, 1995.
4 - Zavlin P.N., Vasiliev A.V. Evaluation of the effectiveness of innovations. - St. Petersburg: Publishing House"Business Press", 1998.
5 - Kovalev V.V. Methods for evaluating investment projects. - M .: Finance and statistics, 2000. S. 54.
6 - Beret V., Havrapek P.M. Guidelines for the preparation of industrial feasibility studies. - M: Interexpert, 1995.
7 - Blekh Yu., Goetze U. Investment calculations / Edited by A.M. Chuikina, L.A. Galyutina. - Kaliningrad: Amber Tale, 1997.
8 - Foreign investment in St. Petersburg // Economics and Life. St. Petersburg regional issue. 1997. No. 6.
9 - Gitmap L.J., Jonk M.D. Fundamentals of investing. - M .: Delo, 1998.
10 - Gazeev M.Kh., Smirnov A.P., Khrychev A.N. Indicators of investment efficiency in market conditions. — M.: PMB VNIIOENGa, 1993.
11 - Financial analysis of the company's activities. - M .: East-service, 1994.
12 - The cash flow of an investment project is the dependence on the time of cash receipts and payments during the implementation of the project that generates it, determined for the entire billing period covering the time interval from the start of the project to its termination (see: " Guidelines for evaluating the effectiveness of investment projects”, approved. Ministry of Economy of the Russian Federation, Ministry of Finance of the Russian Federation, Civil Code of the Russian Federation on construction, architectural and housing policy No. VK 477 of 06/21/1999).
13 - All assumptions are based on deep analysis market, using data from well-known analytical companies.
14 - Mindich D.A. Growing business finance. - M .: CJSC "Expert RA", 2007.
In the fourth section, we will study the potential ability of the project to provide sufficient growth rates for invested funds. The analysis is based on determining the performance indicators of investment projects.
The methods used in the economic evaluation of the effectiveness of investment projects are divided into static (simple) and dynamic (complex).
Static Methods are used for a quick and approximate assessment of the attractiveness of investment projects, they are used at the preliminary stage of project examination.
The main feature of simple indicators for evaluating the effectiveness of projects is that their calculation does not take into account the unequal cash flows that arise at different points in time, the indicators are calculated without discounting.
In practice, two indicators are most often used: return on investment and payback period.
ROI(ROI - return of investments) makes it possible to establish not only the fact of the profitability of the project, but also to assess the degree of this profitability. Return on investment (or rate of return) can be used to compare the effectiveness of a project with alternative investment options. In particular, a project can be considered economically profitable if its rate of return is not less than the bank discount rate.
The return on investment is calculated as the ratio of the average annual profit (NP avg / year.) to the total investment costs (K) according to the formula:
| (8) |
If the calculated return on investment (rate of return) satisfies the level required by investors, then the project is attractive to them.
Payback period(PP - payback period) of the project determines the calendar period of time from the moment of the initial investment of capital in the investment project until the moment when the cumulative total of the net total income (net cash flow) becomes equal to zero. This is the period of time during which the project does not make a profit, that is, the entire amount of money generated by the project is directed to the return of the initially invested capital.
To calculate the payback period, you must:
2) determine at what year of life the cumulative cash flow takes a positive value;
3) find the part of the investment amount not covered by cash receipts in the period preceding the year determined in the previous step;
4) divide this uncovered balance of the investment amount by the amount of cash receipts in the period in which the cumulative flow takes a positive value.
The result obtained will characterize the share of this period, which, in total with the previous whole periods, forms the total value of the payback period.
The payback period can also be calculated by gradually subtracting the amount of depreciation and net profit for the next planning interval from the total capital costs. The interval for which the balance is leveled or becomes negative, and is the payback period. If this result is not achieved, then the payback period exceeds the established life of the project.
If the payback period is within the lifetime of the project under consideration, then the ratio between net annual real money flows and initial investment is favorable.
Table 10 should be used to calculate simple performance indicators for an investment project.
Table 10 - Calculation of static indicators of the effectiveness of the investment project
| Indicators | years | Total | ||||||||||
| 1. Net profit, thousand den. units (Table 8 item 12) | - | - | 1857,12 | 2990,32 | 3411,92 | 3833,52 | 4255,12 | 4676,72 | 5098,32 | 5519,92 | 5941,52 | 37584,48 |
| 2. Average annual profit, thousand den. units (clause 1/10) | - | - | - | - | - | - | - | - | - | - | - | 3758,45 |
| 3. The total volume of investment costs, thousand den. units (Table 5) | - | - | - | - | - | - | - | - | - | - | - | |
| 4. Return on investment, % (clause 2/clause 3) | - | - | - | - | - | - | - | - | - | - | - | 9,28 |
| 5. Cash flow for operating and investment activities (Table 9, item 6) | -40500 | 7315,28 | 9801,84 | 10170,32 | 10141,92 | 10113,52 | 10085,12 | 10056,72 | 10028,32 | 9999,92 | 13166,22 | 60379,18 |
| 6. Accumulated cash flow from operating and investment activities | -40500 | -33184,72 | -23382,88 | -13212,56 | -3070,64 | 7042,88 | 17128,00 | 27184,72 | 37213,04 | 47212,96 | 60379,18 | - |
| 7. Payback period, years (4+p.6 4th year/p.5 5th year) | 4,30 |
Throughout the billing period, there is an increase in net profit. In the second year, the value of net profit amounted to 1857.12 thousand den. units, and in the tenth 5941.52 thousand den. units At the same time, the size of the average annual profit is 3758.45 thousand den. units Since the company had a loss in the first year, there is no net profit this year (see Table 8). The loss is covered by profit before tax in the second year. The return on investment was 9.28%, and the payback period was 4.30 years. The calculated static indicators (ROI and payback period) are used to quickly assess the attractiveness of an investment project.
For a more accurate assessment of the investment project, we calculate the dynamic indicators.
Dynamic Methods investment calculations are used to justify investment projects when it comes to long-term projects that are characterized by income and expenses that change over time.
For rate investment attractiveness of the project, all indicators of the future activity of the investment project are adjusted, taking into account the decrease in the value of cash flows as the transactions associated with it move away in time. For this, discounting is used - an operation that is the reverse of compound interest, the process of recalculating the future sum of money into the real one.
In practice, the methods for calculating net present value (NPV), return on investment index (PI), internal rate of return (IRR) and discounted payback period (DPP) are most widely used.
Net present value(NPV - net present value) - this is the difference between the current, discounted on the basis of the discount rate, the cost of receipts and investment costs.
Calculation formula this indicator as follows:
where IC t - investment costs in period t, den. units
In this case, if:
NPV > 0, then the project should be accepted (the project is effective at a given discount rate);
NPV< 0, то проект следует отвергнуть;
NPV = 0, then the project is neither profitable nor unprofitable (does not bring profit or loss).
One of the factors determining the value of the net present value of the project is the scale of activities, which is expressed in terms of investment, production and sales. Therefore, the use of this method is limited for comparing different projects: a large NPV value will not always correspond to the most efficient use investment . In such a situation, it is reasonable to calculate return on investment index(PI - profitability index) according to the formula:
Discounted investment costs, den. units
If: PI > 1, then the project should be accepted;
PI< 1, то проект следует отвергнуть;
PI = 1, then the project is neither profitable nor unprofitable.
The profitability index is a relative indicator, which makes it convenient when choosing one project from a number of alternative ones with approximately the same NPV values, or when completing an investment portfolio with the maximum total value of net present value.
Internal rate of return (IRR - internal rate of return) characterizes the effectiveness of investments in the project at a certain point in time. The internal rate of return is the discount rate at which the net present value is zero. Therefore, at this discount rate, the value of the discounted cash receipts is equal to the discounted investment costs. In the case when investments and returns from them are given in the form of a stream of payments, the internal rate of return is defined as a solution to the equation:
The internal rate of return is found by iterative selection of discount rate values when calculating the net present value of the project. The algorithm for determining the internal rate of return by the selection method is as follows:
1) two values of the discount rate are selected and NPV is calculated. For one value of the discount rate, the NPV value must be greater than zero, and for another, it must be less than zero;
2) coefficient values and NPV values are substituted into the formula (interpolation):
| , | (12) |
where r 1 is the discount rate at which NPV is positive;
r 2 - discount rate at which NPV is negative;
NPV 1 - the value of the positive value of NPV;
NPV 2 - the value of the negative value of NPV.
In order for a project to be accepted, it must generate a certain rate of return. The internal rate of return of the project is compared with the investor's required rate of return on invested capital.
In the case when the internal rate of return is equal to or greater than the investor's required rate of return on capital, investment in this investment project is justified, and the question of its acceptance may be considered. Otherwise, investments in this project are inappropriate.
If a comparison of alternative (mutually exclusive) investment projects in terms of net present value and internal rate of return leads to opposite results, preference should be given to net present value.
Thus, the internal rate of return (profitability) for any project is the maximum rate of interest that can be used to finance the project without prejudice to the interests of the firm and shareholders. The enterprise can make any investment decisions, the level of profitability of which is not lower than the price of funds raised for this project.
Discounted payback period(DPP) - the number and duration of periods during which there is a full recovery of invested funds.
The choice of investment decision is carried out according to the principle: the shorter the payback period; the more efficient they are. According to this principle, any project can be accepted, the payback period of which is less than some predetermined due date(for example, the rate of return).
This indicator can be effectively used along with indicators of net present value or internal rate of return.
The discounted payback period is equal to the minimum number of years (n) at which
Obviously, in the case of discounting, the payback period will increase. Therefore, a project that is eligible under the PP criterion may not be eligible under the DPP criterion.
If the net discounted income is positive, the profitability index is greater than one, the internal rate of return significantly exceeds the threshold rate of return for the firm, then the project can be accepted, as it satisfies all the criteria for assessing the economic efficiency of investment projects.
The calculation of complex performance indicators of the investment project is shown in Table 11. The accumulated discounted cash flow for operating and investment activities is shown in Figure 3.
Table 11 - Calculation of dynamic performance indicators of the investment project
| Indicators | years | Total | ||||||||||
| 1. Cash flow from operating and investment activities, thousand den. units (Table 9 p.6) | -40500 | 7315,28 | 9801,84 | 10170,32 | 10141,92 | 10113,52 | 10085,12 | 10056,72 | 10028,32 | 9999,92 | 13166,22 | 60379,18 |
| 2. Discount factor r =14 | 0,877 | 0,769 | 0,675 | 0,592 | 0,519 | 0,456 | 0,400 | 0,351 | 0,308 | 0,270 | - | |
| 3. Discounted cash flow from operating and investment activities, thousand den. units (item 1*item 2) | -40500 | 6415,50 | 7537,61 | 6864,97 | 6004,02 | 5248,92 | 4598,81 | 4022,69 | 3519,94 | 3079,98 | 3554,88 | 10347,32 |
| 4. Accumulated discounted cash flow from operating and investment activities, thousand den. units | -40500 | -34084,50 | -26546,89 | -19681,92 | -13677,90 | -8428,98 | -3830,17 | 192,52 | 3712,46 | 6792,44 | 10347,32 | - |
| 5. Discounted positive cash flow, thousand den. units (item 3 all positive values) | - | - | - | - | - | - | - | - | - | - | - | 50847,32 |
Table 11 continued
| Indicators | years | Total | ||||||||||
| 6. Discounted value of investment costs, thousand den. units (Table 5) | - | - | - | - | - | - | - | - | - | - | - | |
| 7. Net present value, thousand den. units (clause 5-clause 6) | - | - | - | - | - | - | - | - | - | - | - | 10347,32 |
| 8. Index of return on investment (clause 5 / clause 6) | - | - | - | - | - | - | - | - | - | - | - | 1,26 |
| 9. Internal rate of return, % | - | - | - | - | - | - | - | - | - | - | - | 19,88 |
| 10. Payback period, taking into account discounting, years (6 + line 4 year 6 / line 3 year 7) | 6,95 |
Rice. 3 Accumulated discounted cash flow from operating and investing activities
Discounted positive cash flow amounted to 50847.32 thousand den. units, the discounted value of investment costs is equal to 40500 thousand den. units, thus, the net discounted income amounted to 10347.32 thousand den. units (NPV>0). The return on investment index is 1.26 (PI>1), the internal rate of return was 19.88% - this is the maximum interest rate that can be used to finance the project without harming the interests of the company and shareholders. Figure 3 shows the project payback period of 6.95 years.
Thus, the calculated indicators reflect the economic efficiency of the investment project.
The internal rate of return is calculated in Table 12 and shown in Figure 4.
Table 12 - Calculation of the internal rate of return of an investment project
| Indicators | years | Total | ||||||||||
| 1. Cash flow from operating and investment activities, thousand den. units (Table 11 item 1) | -40500 | 7315,28 | 9801,84 | 10170,32 | 10141,92 | 10113,52 | 10085,12 | 10056,72 | 10028,32 | 9999,92 | 13166,22 | - |
| 2. Discount factor at r =20 | 0,833 | 0,694 | 0,578 | 0,482 | 0,402 | 0,335 | 0,279 | 0,233 | 0,194 | 0,162 | - | |
| 3.Discounted cash flow at r =20 (item 1*item 2) | -40500 | 6093,63 | 6802,48 | 5878,44 | 4888,41 | 4065,64 | 3378,52 | 2805,82 | 2336,60 | 1939,98 | 2132,93 | -177,55 |
| 4. Discount factor at r =19 | 0,840 | 0,706 | 0,593 | 0,498 | 0,418 | 0,351 | 0,295 | 0,248 | 0,208 | 0,175 | - | |
| 5. Discounted cash flow at r = 19 (item 1*item 4) | -40500 | 6144,84 | 6920,10 | 6031,00 | 5050,68 | 4227,45 | 3539,88 | 2966,73 | 2487,02 | 2079,98 | 2304,09 | 1251,77 |
| 6. Internal rate of return, % | - | - | - | - | - | - | - | - | - | - | - | 19,88 |
Rice. 4 Determination of the internal rate of return
An investment, unlike a loan, can be lost by an investor when investing in an unsuccessful project.
In such cases, a preliminary assessment of investment projects is of particular relevance for investors. For most investors, the evaluation of the effectiveness of investment projects is a common procedure, an indispensable attribute of the investment process, a test check of the feasibility of investing.
Investors invest in the production of material goods for profit, and, as a preliminary assessment, they determine the economic efficiency of the investment project. The object of attachment can be shopping center, a store, a showroom or an investor acquires material assets for their further resale, that is, with such an investment, material benefits are not created, but they bring profit to the investor. In this case, the investor also needs to make a preliminary analysis and determine the effectiveness of the project, but this will be the commercial effectiveness of the investment project.
If investments are directed to social facilities that do not bring profit to the investor, then the effectiveness of the investment project is assessed from the standpoint of achieving social purpose project.
This may be improving the living conditions of a group of the population, increasing the provision of transport, household or other social services to citizens. In this case, the goal of the project, its specific parameters, the achievement of which will be considered a social effect, should be clearly defined. This kind of efficiency is called the socio-economic efficiency of the investment project.
The state in Russia is the largest investor, while investments are made from the federal, regional and local budgets. In addition to purely budgetary investment, public-private partnership (PPP) has become widespread. This type of mixed investment has an effect on the budget and for the private investor. In this investment option, the effect of the project as a whole is determined first, and then the effect for the budget and separately for private investors. Accordingly, an assessment of the economic efficiency of the investment project as a whole is given, then the budgetary efficiency of the investment project is determined, and finally, an assessment of the economic efficiency of the investment project for a private investor is given.
- the effectiveness of the project as a whole;
- the effectiveness of the project participants;
- project budget performance.
Budget efficiency is assessed from the standpoint of replenishing the budget from an investment project - the excess of budget revenue over expenditure, both in the form of cash receipts under the item of spending funds on investments, and in the form of direct and indirect receipts from taxes, fees, excises and other forms of income generation or reduction budget expenditures from the implemented project.
In addition to the types mentioned above, they consider the environmental efficiency of investment activities, the result of which is considered to be an improvement in the environment in a given area or area, a decrease in pollution of the atmosphere, water resources and nature in general.
Investments in this area are constantly growing, therefore, the relevance of assessing environmental performance is increasing.
General principles of evaluation
The evaluation of all investment projects is based on general principles evaluating the effectiveness of investment projects:
- the investment project is considered during the full period of its existence;
- the evaluation should take into account the relationship of project participants and their economic environment;
- taking into account the impact of the project on changing the future;
- cash flow simulation;
- choosing a project for the maximum effect it creates;
- accounting for changes in the value of money over time;
- accounting only for costs and results reflected in the project as future, planned costs;
- in the evaluation, comparable conditions should be provided for comparing different projects or their options;
- optimization of the project according to the pessimistic variant of the conditions for its implementation;
- multivariate assessment should be provided;
- the calculations should take into account the need for working capital for the created production assets;
- taking into account the impact of inflation on the price of resources during the life of the project;
- taking into account the impact of risks associated with the implementation of the project.
Methods for evaluating investment projects
Methods for evaluating the effectiveness of investment projects are divided into static and dynamic.
Static Methods
Static methods for evaluating investment projects include indicators reflecting the effectiveness of the project in this moment, or the average estimate for the investment investment period. They form a group of indicators:
- P is the return on investment.
- PP-.
- ARR - investment efficiency ratio.
ROI shows the ratio of all profits received over the period of the project to the amount of investments invested in it. This indicator reflects the level of return on invested funds as a percentage of profit per 1 ruble of investments. For example, P is equal to 25%, which means that each ruble of investment provided 25 kopecks of profit.
Payback period shows the moment when the amount of income received from the activities of the enterprise is equal to the amount of investments invested in it. This indicator is measured in months and years. That is:
PP= min t, at which P(CF)=I,
- P(CF) - the balance of accumulated cash flow from the activities of the enterprise;
- I - the size of the initial investment in the project.
where, YNB(Yealy net benefit) — annual net profit.
Investment efficiency ratio or the return on investment ratio shows the ratio of the average annual profit received from the implementation of investments to the average investment. It is calculated by the formula:
ARR = P(av)/ (1/2)I(av);
- P(av) — average annual profit;
- I(av) - the average value of the initial investment.
- If at the end of the project it ceases to exist, then the ARR calculation formula takes the following form:
ARR = P(av)/(1/2)((I(o) -I(l)) ,
- I(o) - the size of the initial investment in the project;
- I(l) - the liquidation value of the initial investment.
Static evaluation methods do not take into account the peculiarities of the evaluation of investment projects in time, which significantly narrows the scope of their use. Nevertheless, the simplicity of calculations and the visibility of these indicators almost always complement the analysis of the effectiveness of investment projects.
Methodology for evaluating the effectiveness of investment projects taking into account the time factor includes a group of such indicators:
- PI - return on investment ratio;
- NPV - net discounted income;
- IRR is the project's internal rate of return;
- DPP is the discounted payback period.
ROI ratio reflects the ratio of net present value (NPV) to the amount of investment in the project (I). That is:
I - initial investment in the project.
Methods for analyzing investment projects for this indicator are quite simple:
- if PI>1 — the project is profitable and can be implemented;
- if PI<1 — проект не рентабелен и отвергается;
- if PI=1, the project requires additional consideration in terms of other performance indicators.
Net present value reflects the total return on investment, taking into account changes in the price of money over time.
NPV = — I+ ∑ n t=1 CF t /(1+r) t ,
- CF t - cash flow from the sale of invested funds in the t-th year;
- r - discount rate;
- n - project lifetime in years from t=1 to n.
Discount rate when calculating NPV, it is taken depending on what kind of capital the investor uses, borrowed or own. If an investor borrows from a bank, then the discount rate must be no less than the loan rate for the project. If the investor invests his own funds, then the discount rate must be no less than the return on the investor's operating capital.
Considering a project based on this indicator is similar to assessing the profitability ratio:
- if NPV>1 - the project is profitable, and the investor's capital increases by the amount of NPV;
- if NPV<1 — проект убыточный и снимается с рассмотрения;
- if NPV=1, the project requires additional consideration in terms of other performance indicators.
Internal rate of return IRR, indicator used for equal evaluation of previous indicators, and when comparing several investment projects. At the same time, it shows the maximum allowable level of the rate of return of the project when using borrowed capital, i.e. IRR cannot be less than the loan rate from the bank for the investor. For most investors, methods for analyzing the effectiveness of investment projects using IRR are sufficient when making a decision on investing in a particular project.
Investments are made from different sources, in total they make up the price of investment funds r(CC).
The level of the IRR indicator should be higher than the price of investment funds, otherwise it makes no sense for the investor to invest in the project, that is, the indicator is a limiter on the profitability of the project, below which the project cannot be accepted for investment.
The indicator is calculated under the condition NPV=0. The calculation is iterative and is carried out using a special program on a computer, the results of the calculations are formed into a table from which it is possible to determine the IRR for specifically selected project indicators.
At:
- IRR>r(CC) — the investor accepts the project for consideration for investment;
- IRR
- IRR=r(CC) — if other indicators (NPV and PI) do not show profitability, then the project is also rejected.
This indicator works well for assessing if the cash flow initiated by investments is relevant, but if losses periodically occur during the life of the project, the indicator does not reflect the real picture. But if the relevance of the cash flow is ensured, the indicator can be used to evaluate investment projects, regardless of the size of the investment.
Economic evaluation investment projects can be supplemented with a project payback indicator taking into account the DPP time - the discounted payback period, which is defined as:
DPP= min t, at which ∑P t (CF)=I, i.e. the amount of accumulated cash flow is equal to the amount of investments made during this period.
Below is an example of an investment project with calculations for evaluating investments in a Mini-TPP based on cogeneration plants for the production of heat and electricity. The main equipment of the station is a Caterpillar G3520 E cogeneration unit, which produces 2 MW of electrical and 1.98 MW of thermal energy. In addition to these 5 installations, the station is equipped with two boilers of 9 MW of thermal power, in order to more fully provide the population with thermal energy. The calculation period is 10 years, until 2016.
Initial data for the project
| Specification of cogeneration equipment: | Price per one. million rubles | |||||||||
| Equipment brand | G3520 E | 48,366 | 5 | |||||||
| Single electric power, kW | 2 022 | Electric power, total, kW | 10 110 | |||||||
| 1 980 | 9 900 | |||||||||
| Specification of boiler equipment: | peak hot water boilers (PVK) | |||||||||
| Equipment brand | Vitomax | Number of units | 9 | 2 | ||||||
| Single thermal power, kW | 9 000 | Thermal power, total, kW | 18 000 | |||||||
| TOTAL THERMAL OUTPUT OF TPP, kW | 31 900 | |||||||||
| Electricity generated and used, kWh per year | cogeneration | |||||||||
| 80 880 000 | 60,0% | 48 528 000 | ||||||||
| With full - 100% - loading of equipment | 79 200 000 | With the planned load of equipment | 60% | 47 520 000 | ||||||
| Generated and used thermal energy, kWh per year | hot water boilers (K) | |||||||||
| With full - 100% - loading of equipment | 176 000 000 | With the planned load of equipment | 40% | 70 400 000 | ||||||
| TOTAL HEAT ENERGY | 255 200 000 | With the planned load of equipment | 40% | 102 080 000 | ||||||
The cost of a turnkey mini thermal power plant is 600 million rubles
Loan amount 569 million rubles
Assessment of the investment attractiveness of the project
| Operating flow | units | 2014 | 2015 | 2016 | 2023 | |
| Income (total) | 0,00 | 368,47 | 380,86 | 573,70 | ||
| For electricity | ||||||
| Electricity revenue | million rubles | 0,00 | 94,48 | 154,20 | 330,55 | |
| By heat energy | ||||||
| Heat revenue | 0,00 | 82,39 | 181,25 | 243,15 | ||
| Connection fee | ||||||
| Connection revenue | million rubles | 0,00 | 191,60 | 45,40 | 0,00 | |
| disposals | ||||||
| Operating expenses (variables) | ||||||
| Gas costs | million rubles | 0,00 | (45,86) | (88,73) | (119,04) | |
| Specific gas consumption, m3/kWh | m3/kWh | (0,26) | (0,26) | (0,26) | (0,26) | |
| Consumption per station, m3 per year (8000 hours per year) | m3 per year | 0 | (4 191 467) | (6 218 794) | (6 218 794) | |
| specific gas consumption for hot water boilers | m3/kWh | (0,17) | (0,17) | (0,17) | (0,17) | |
| Consumption for hot water boilers | m3 per year | 0 | (4 789 699) | (9 579 398) | (9 579 398) | |
| growth rate | % | 110% | 110% | 110% | 1 | |
| Cost of 1000 m3 of gas, rub (VAT included) | rub. | 4,64 | 5,11 | 5,62 | 7,53 | |
| Annual costs for fuel gas, million rubles | million rubles | 0,00 | (45,86) | (88,73) | (119,04) | |
| Spare parts and service | million rubles | 0,00 | (4,72) | (7,14) | (8,37) | |
| fixed costs | million rubles | (21,15) | (21,75) | (21,38) | (46,79) | |
| Total disposals operating | million rubles | (21,15) | (163,34) | (162,15) | (246,56) | |
| EBITDA | million rubles | (21,15) | 205,14 | 218,70 | 327,14 | |
| as a percentage of revenue | % | 56% | 57% | 57% | ||
| Operating profit before income tax | (83,70) | 155,10 | 181,17 | 327,14 | ||
| Net operating income | (83,70) | 124,08 | 144,94 | 261,72 | ||
| Accumulated Profit/Loss | (83,70) | 40,38 | 185,31 | 1 797,98 | ||
| Investment flow | (600,48) | 0,00 | 0,00 | 0,00 | ||
| The total cost of the station | (600,48) | |||||
| Investment loan | 568,64 | (113,73) | (113,73) | 0,00 | ||
| Net cash flow | 1 723,85 | (115,54) | 41,37 | 67,44 | 327,14 | |
| Debt-free flow | 1 911,51 | (621,63) | 205,14 | 218,70 | 327,14 | |
| Discounted Flow (NPV) | 732,73 | -621,63 | 183,16 | 174,35 | 105,33 | |
| IRR | 20% | |||||
| Payback period (DPP) | 4 | 1 | 1 | 1 | 0 |
The assessment of the investment project, using the example of a newly built mini thermal power plant, shows that an investment loan at 11% per annum provides the investor with an average annual return of at least 20% and provides a return on investment in 4 years. NPV for the investment period (10 years) is 732.73 million rubles, and operating profit averages over 150 million rubles. in year. Analysis of investment projects using the above indicators gives the investor a complete picture for making a decision on investing in any project.
Chapter 10
Assessment of investment projects
The essence, calculation procedure and features of the application in the appraisal practice of indicators of the economic efficiency of investment projects must be constantly studied. This is due, on the one hand, to the fact that the investment project acts either as an independent object of evaluation, or as one of the elements of property identified in the cost approach along with machinery and equipment, intellectual property, etc.
On the other hand, if the purpose of the appraisal is the purchase and sale of property, then the potential owner intends to invest funds that match the final value of the value, determined by a combination of three approaches: profitable, comparative and costly. Therefore, the discounting process carried out in the income approach needs to be adjusted.
The attractiveness of an investment project can be assessed by a large number of factors and criteria: the situation on the investment market, the state of the financial market, the professional interests and skills of the investor, the financial viability of the project, the geopolitical factor, etc. However, in practice, there are universal methods of investment attractiveness of projects that give a formal answer: it is profitable or unprofitable to invest in this project; which project to prefer when choosing from several options.
Investing, from the point of view of the owner of capital, means giving up immediate benefits for the sake of generating income in the future. The problem of evaluating investment attractiveness is to analyze the proposed investment in the project and the flow of income from its use. The analyst must assess how the expected results meet the requirements of the investor in terms of profitability and payback period.
To make a decision on an investment project, it is necessary to have information about the nature of full cost recovery, as well as the correspondence of the level of additional income received to the degree of risk of uncertainty in achieving the final result.
Distinguish between simple (static) and sophisticated valuation methods based on the theory of changes in the value of money over time.
Simple Methods traditionally used in domestic practice. Methodological recommendations for calculating the economic efficiency of capital investments provided for a system of indicators that meets the current business conditions.
The most important indicators include:
1) coefficient of overall economic efficiency capital investments
E = P / C
where P- annual profit;
To - capital investments;
2) payback period
T = K/P
3) an indicator of comparative economic efficiency, based on the minimization of reduced costs,
P 3 \u003d C + E H - * K:,
where C - current costs (cost) for the same option;
E n - normative coefficient of efficiency of capital investments;
To - capital investments for each option.
A distinctive feature of the investment process is the gap in time, usually more than one year, between the investment of money, property or property rights and the receipt of income. The main drawback of the previously existing domestic methods was ignoring the time estimate of costs and revenues.
The transition to market relations, the adoption of legislative acts relating to investment activities, gave investors the freedom to choose:
Investment objects;
Criteria for evaluating economic efficiency;
Sources of funding;
Ways to use the end results.
Therefore, when evaluating the investment attractiveness of projects, it is necessary to take into account inflationary processes, investment opportunities, and the need to service the capital attracted for financing.
Project evaluation complicated methods is based on the fact that the streams of income and expenses for the project, reflected in the business plan, are not comparable. For an objective assessment, it is necessary to compare the costs of the project with the income reduced to their current value at the time of the costs, based on the level of risk for the project being evaluated, i.e. income must be discounted.
The economic evaluation of the project characterizes its attractiveness in comparison with other investment options. When evaluating investment projects, taking into account the time factor, the following indicators are used:
The period (term) of the payback of the project;
Net present value of income;
The rate of return (profitability ratio) of the project;
Internal rate of return of the project;
Modified rate of return;
Rate of return financial management.
Assessment of the investment attractiveness of the project involves the use, as a rule, of the entire system of indicators. This is due to the fact that each method has some disadvantages that are eliminated in the process of calculating another indicator. The economic content of each indicator is not the same. The analyst receives information about various aspects of the investment project, so only a set of calculations will make it possible to make the right investment decision.
10.1. The payback period (term) of the project
The payback period is defined as the expected number of years required to fully recover the investment costs. Payback period
T ok = Number of years prior to the payback year + (Unrecovered value at the beginning of the payback year / Cash flow during the payback year)
Example (conditional). Consider the methodology for calculating the payback period. The investment project "Uranus" requires an investment of 1000 den. units, the projected income stream will be: in the first year - 200; in the second year - 500, in the third year - 600, in the fourth year - 800, in the fifth year - 900. The discount rate is 15%.
Calculations of a simple (static) method indicate that the project will pay off in two and a half years. However, this period does not take into account the required rate of return on investment in a particular area. More objective results are obtained by a technique based on a temporary assessment of the cash flow.
To determine the payback period, you must:
2) calculate the accumulated discounted cash flow as
the algebraic sum of the cost and revenue stream of the project. Accumulated
discounted cash flow is calculated before the first
positive value;
3) find the payback period by the formula.
Let's calculate the payback period of the Uranium project according to table 1.
Table 1 - The process of recovering the initial investment(den. units)
|
Flow |
Period |
|||||
|
Cash, from the business plan Discounted Cash Accumulated discounted cash |
(1000) (1000) 1000 |
|||||
We get:
T ok \u003d 3 + 54/458 \u003d 3.1 years
The period actually required to recover the invested amount, taking into account the time factor, is 0.6 years longer than the period determined by the simple method.
This indicator determines the period during which investments will be “frozen”, since the real income from the investment project will begin to flow only after the payback period has expired. When selecting options, preference is given to projects with the shortest payback period.
It is advisable to calculate the payback period for projects financed by long-term obligations. The payback period for the project must be shorter than the period of use of borrowed funds, established by the lender.
The indicator is a priority if the main thing for an investor is the fastest possible return on investment, for example, the choice of ways to financially recover bankrupt enterprises.
The disadvantages of this indicator are as follows:
The calculations ignore the income received after the proposed payback period of the project. Consequently, when selecting project options, serious miscalculations can be made if the application of this indicator is limited;
Using it to analyze an investment portfolio requires additional calculations. The payback period for the portfolio as a whole cannot be calculated as a simple average.
10.2. Net present value of earnings
The net income method allows you to classify projects and make decisions based on a comparison of costs with income from an investment project, reduced to the current cost.
To calculate the net present value of income (PTSD) required:
1) determine the present value of each amount of the income stream, based on the discount rate of the period of income occurrence;
2) sum up the reduced income for the project;
3) compare the total present value with the cost of the project and calculate the net present value of the income:
PTSD \u003d PD - PR,
where PD- total reduced income;
ETC - the costs of the project.
Projects with a negative value PTSD, investor rejects. When considering several options, preference is given to a project with maximum value this indicator.
We calculate the indicator PTSD for the analyzed project "Uranium", taking into account the data in Table 2.
Plus PTSD shows how much the value of the investor's assets will increase from the implementation of this project. Therefore, preference is given to the project with the highest net present value of income. Index PTSD refers to the category of absolute, which allows you to summarize the results of selected projects to determine PTSD for the investment portfolio as a whole.
Table 2 - Calculation of the total discounting of income(den. units)
|
Flow |
Period |
|||||
|
Cash, from the business plan |
(1000) |
|||||
|
Discounted Cash |
(1000) |
|||||
|
Total present stream of income |
(174 + 378 + 394 + 458 + 447) = 1851 |
|||||
|
PTSD |
1851-1000 = + 851 |
|||||
The disadvantages of this indicator are:
Absolute value PTSD in a comparative analysis of investment projects, it does not take into account the volume of investments for each option;
Value PTSD on the project depends not only on the amount of costs and the distribution of the income stream over time. The results are significantly affected by the discount rate applied by analysts. The assessment of the level of risk is carried out subjectively.
Let's consider the impact of the discount rate on the profitability of the Uranium project (Table 3).
Table 3 - Change in PTSD depending on the growth of the discount rate
|
Discount rate, % |
|||||
|
Net present value of income, den. units |
1526 |
An increase in the discount rate reduces the amount of real growth in assets. Consequently, the same project under different conditions, estimated by the discount rate, will give different results and may turn from profitable to unprofitable.
10.3. Rate of return (profitability ratio) of the project
This indicator reflects the effectiveness of compared investment projects, which differ in terms of costs and income streams.
Project rate of return (SDP) calculated as a ratio PTSD according to the project to the amount of investments:
PSD = PTSD / PR * 100%
There is another option for calculating this indicator as the ratio of the amount of reduced income to reduced expenses:
SDP = PD / PR
The rate of return for the Uranus project is: (851: 1000) * 100% = 85.1%, or 1851: 1000= 1.85.
According to the economic content, the rate of return of the project shows the value of the increase in assets per unit of investment.
If the index is greater than one, then the investment project has a positive net present value of income. However, preference is given to the project with the maximum SDP.
When making investment decisions, analysts prefer the indicator PSD, if the value PTSD in the considered projects is the same. Index PTSD is absolute, so it is possible for projects to have an equal net present value of earnings.
Example. Project X requires an investment of 900 den. units and provides a stream of income in the amount of 300, 400, 600. Project Y costs 325, and the expected stream of income will be 100, 200, 300. The discount rate used in making the decision is 10% (table 4).
The analyst must choose one of the two proposed calculations.
Table 4 - Project characteristics X and Y
|
Index |
Project X |
Project Y |
|
Total present income |
1055 |
|
|
Project costs |
||
|
PTSD |
In this situation, it is impossible to select a project using the net present value method, and the indicator should be used SDP. In projectX :
SDP \u003d 155/900 * 100 \u003d 17.2%
In project W:
SDP \u003d 157/325 * 100 \u003d 43.3%
The project is more profitable for the investor U, since it has a rate of return of 2.5 times more.
The advantages of the rate of return of the project are that this indicator is relative and reflects the efficiency of the unit of investment. In addition, in conditions of limited resources, this indicator allows you to create the most effective investment portfolio.
The main drawback of the indicator is the dependence of the calculation results on the discount rate.
10.4. Project internal rate of return
Project internal rate of return (VSDP) is a discount rate that equates the amount of the reduced income from the project to the amount of investment (costs). WHDP provides zero net present value of income. Evaluation of investment projects using WHDP is based on determining the maximum discount rate at which projects will break even.
Calculation WHDP without a financial calculator is quite laborious, as it is based on the use of the interpolation method and discount tables.
When calculating the internal rate of return of a project:
1) an arbitrary discount rate is chosen, and on its basis the total present value of the income from the project is calculated;
2) the costs of the project are compared with the resulting present amount of income;
3) when the initial arbitrary discount rate does not give
zero net present value of income, the second rate is chosen
discounting according to the following rule:
if PTSD > Oh, then the new discount rate must be greater than the original one;
if PTSD< Oh, then the new discount rate must be less than the original;
4) the selection of the second discount rate is carried out until the total current value of income is both greater and less than the project costs;
5) the internal rate of return of the project is found by interpolation:
a) the interval is determinedb) a proportion is drawn up and an equation is solved
c) calculated
VSDP \u003d art. d. 1 + X .
Using the above method, we calculate the internal rate of return for the Mars project, according to which the costs will be 1200, income - 50, 200, 450, 500, 600 den. units
The calculation sequence is as follows:
1) find the amount of the income stream, discounted at a rate of 5%, it will be:
48 + 181 + 389 + 411 + 470 = 1499;
2) define PTSD
1499 - 1200 = 299 i.e. PTSD > 0;
3) choose a new discount rate, it should be more than 5%, since PTSD > 0;
4) calculate the total income stream discounted at a rate of 20%,
42 + 139 + 260 + 241 + 241 = 923;
5) define PTSD
923 - 1200 \u003d - 277, i.e. PTSD< 0;
6) calculate WHDP:
Denote the interval
|
[ |
1499 |
|||
|
1200 |
5% + X |
|||
Set up a proportion and solve the equation
X = 7.8%;
calculate
ARDP= 5 + 7.8 = 12,8%.
Preference is given to the project with the highest value of this indicator. Usage WHDP in the analysis and selection of investment projects is based on the interpretation of this indicator. WHDP is an individual indicator of a specific project, represented not only by a given amount of costs, but also by a stream of income, individual both in terms of the value of each element of the stream, and in terms of the time of occurrence.
Example. Consider the influence of the distribution of income over time on the indicator VSDP. Let's analyze the revenue streams for three projects X, Y, Z (Table 5).
Table 5 - The impact of cash flow on the value WHDP den. units
|
Index |
Project X |
Project Y |
Project Z |
|
Expenses |
(1200) |
(1200) |
(1200) |
|
Income: |
|||
|
First year |
|||
|
second year |
|||
|
third year |
|||
|
WWDP, % |
All three projects require the same costs, the same amounts of income in the form in which they will be presented in financial statements respective years. However, differences in the distribution of the income stream over time have a significant impact on the indicator VSDP. The internal rate of return of the Y project is almost 1.6 times higher than that of the project Z.
WHDP can be interpreted as a kind of "margin of safety" of the project, reflecting its stability in the face of a possible increase in risk. Adverse changes affecting both the economy as a whole and a specific type of business require an adequate level of discount rate. Projects with the maximum value WHDP more attractive, as they are potentially capable of withstanding large loads on investment capital associated with a possible increase in its value.
Another interpretation is also possible: WHDP is considered as a single deposit rate, providing equal investment attractiveness for two investment options. In the first option, the deposit is opened in the year of the project for an amount equal to its cost. In the second option, funds are placed on the replenished deposit account, coinciding in amount and period of occurrence with the income stream for the analyzed project. The value of the deposit rate should ensure that the accumulated amount matches at the end of the project life cycle.
Calculation of indicators WHDP in the world practice of project financial analysis is an important stage. Comparison of calculated value WHDP with the required rate of return on capital in this particular area allows to reject inefficient projects at an early stage.
However, the method of evaluating projects based on comparison WWDP, there are serious shortcomings arising from the economic content of the indicator:
It is difficult to use the ARDP to assess the investment portfolio as a whole, since, unlike the PTSD indicator, it is not summed up and characterizes only a specific project;
The ARCF requires particular application when analyzing projects that have several large negative cash flows during the economic life of the project. Due to repeated investment, the net present value of income will go to zero several times. Therefore, the WWDP will have the same number of solutions. For analysis, it is recommended to use the minimum value of the internal rate of return of the project;
The project appraisal is based on the hypothetical proposal that free cash flows are reinvested at an estimated rate equal to VSDP. In practice, liquid deposit investments bring a minimum return, the level of which is usually below the required rate of return on capital.
In this way, WHDP is an abstract indicator, but its use in the selection of projects gives good results.
In the process of selecting one of two projects (for example, projects A and B), the analyst may encounter the following situations:
1. Project B provides a large increase in assets (HTSD) and has the best parameters for WWAP on compared with projects A (Fig. 1).
Rice. one
AT this example project B is certainly attractive.
2. Project A provides a greater increase in assets, project B has better parameters for WHDP(Fig. 2).
From fig. 2 shows that there is some discount rate X , which equalizes the values in projects A and B PTSD. This discount rate is a critical point that changes the attractiveness of the projects being evaluated:
If the discount rate applied by the analyst is less than the critical value, then project A is more attractive;
Rice. 2
If the discount rate that assesses the risk of investing in a given project (object of ownership) is greater than the critical value, then the investment attractiveness of the projects changes, and project B becomes more profitable.
10.5. Modified rate of return
The modified rate of return (MRR) of an investment project eliminates a significant drawback of the project's internal rate of return, which occurs in the event of repeated cash outflows. An example of such repeated outflows is real estate investments that involve purchase on an installment plan or construction that takes place over a period of several years. Method of calculation WHDP involves the reinvestment of amounts intended for investment in an investment project in subsequent years, at a rate equal to VSDP. However, in practice this is unlikely.
If project costs are incurred over several years, then temporarily available funds, which the investor will have to invest in the project in the future, can be invested in another secondary project. The main requirements for temporary investments are security and liquidity, since the invested funds must be returned exactly in accordance with the cost schedule for the main investment project.
The value of the safe liquid rate is determined by analyzing the financial market. In each case, the analyst determines the value of the safe liquid rate individually, but in any case, its level is relatively low.
Discounting costs at a safe liquid rate makes it possible to calculate their total present value, the value of which makes it possible to more objectively assess the level of profitability of an investment project.
When calculating the modified rate of return:
1) the safe liquid rate of return is determined;
2) the costs of the project, distributed over the years of investment, are discounted at a safe, liquid rate;
3) a modified cash flow is compiled;
4) the MRR is calculated similarly to the calculation of the internal rate of return, but based on the modified cash flow.
Example. Consider the procedure for calculating the MSD. There is a project "Venus", the costs of which are 750, 750, the income stream by years: 400, 500, 700, 600 (money units).
Funds intended to be invested in the project in the second year may be placed for one year in a safe project, for example, in public securities. If they provide an income of 4% per annum, then the investor in the first year must invest:
750 den. units - in the main project;
750 JPV ] 4% = 750 0.9615 = 721 den. units - in government securities.
Thus, the total investment will be 1471 den. units (Fig. 3).
Fig.3. Cost modification at safe liquidity rate
Further calculation is carried out in the same way as the calculation of the internal rate of return of the project - by interpolation. Cash flow in a modified form is presented in table 6.
Table 6 - Cash flow modification at a safe liquidity rate 1
Cash, from the business plan
(750)
(750)
Modified cash MSD = 11.8%
(1471)
10.6. Financial management rate of return
Improving the methods for assessing the attractiveness of investment projects touches upon the problem of the investor's use of income received from the implementation of projects. These funds will be invested in various new projects based on financial opportunities and investor policies. Permissible level risk for such projects may be higher than for the investment of temporarily free funds intended for the main project. In addition, diversification of investments and, consequently, the multiplicity of investment rates of return are possible. The financial manager, who determines the financial policy at the stage of receiving income from the main project, calculates the average, or "circular", rate of return on future investments.
When calculating the financial management rate of return (RFRM):
1) a safe liquid rate of return is determined;
2) the amount of costs for the investment project, discounted at a safe liquidity rate, is calculated;
3) a "circular" rate of return is determined;
4) the total future value of income from the analyzed investment project, accumulated at the "circular" rate of return, is calculated;
5) a modified cash flow is compiled;
6) the rate of return of financial management is calculated similarly to the calculation WHDP based on modified cash flow (clause 5).
Example. Compute SDFM for the Venus project. The current cost of the project costs is 1471 (see the previous paragraph). Let's determine the future value of income from the Venus project if the "circular" rate of return is 8%:
400[FV]3% =400 1.2597 = 504;
5 00 [FV]2 8 * =500-1.1664 = 583;
700[FV]1 8% = 700 1.08= 756;
600[ FV ] 0 8% =600 1.0 = 600;
Sum = 2443 (Fig. 4).
Rice. four. Modification of the income stream at a "circular" rate of return
Table 7 Modified cash flow for the Venus project
|
Flow |
Period |
|||||
|
Cash, from the business plan |
(750) |
(750) |
||||
|
Modified monetary SDFM = 10.7% |
1471 |
2443 |
||||
The calculation of the project's internal rate of return (Table 7) will be based on the cash flow modified at the safe liquidation rate (applied to costs) and the round-robin rate of return (applied to the revenue stream).
conclusions
Assessment of the investment attractiveness of projects involves comparing the costs and income of the project, taking into account the time factor.
The discount rate used to calculate the value of income depends on the degree of risk of the project being evaluated.
The appraiser can use six indicators that reflect various aspects of the economic efficiency of the project. The final decision on investment attractiveness can only be made on the basis of integral information obtained using the entire system of indicators.
The payback period (term) of the project informs about the time period required to return the invested funds, but does not take into account the dynamics of income in the subsequent period.
The net present value of income reflects the real increase in assets from the implementation of the project being evaluated. However, the indicator significantly depends on the applied discount rate and does not take into account the amount of project costs.
The rate of return (profitability ratio) of the project reflects the amount of net present value received per unit cost of the project. The indicator depends on the applied discount rate, i.e. is subjectively influenced.
The internal rate of return of the project reflects the "margin of safety" of the project, since according to economic content is the discount rate that equalizes the present revenues with the costs of the project. The disadvantage of the method is the hypothetical assumption of reinvestment at the internal rate of return, which is impossible in practice. In addition, if during the analyzed period sufficiently large costs occur several times, the indicator has a multiple solution.
The modified rate of return is calculated for projects that assume the distribution of costs over the years. Therefore, free funds intended for investment in the main project in subsequent periods can be temporarily invested in other projects that meet the conditions of safety and liquidity. Since secondary projects provide some income, the need for investment in the initial period will be reduced based on the level of the safe liquid discount rate.
The financial management rate of return assumes that the income received from the project can be invested in several projects with different levels of return. The analyst determines the average, or “circular”, rate of return and, on its basis, calculates the amount of savings by the time the last amount of income occurs. Different rates are used to adjust the cost stream and revenue stream as close to reality as possible.
AT federal law"On investment activity in the Russian Federation, carried out in the form of capital investments" by an investment project is meant a rationale for the economic feasibility, volume and timing of capital investments. Including the necessary design and estimate documentation, developed in accordance with the legislation of the Russian Federation and approved in the prescribed manner by standards (norms and rules), as well as a description of practical actions for the implementation of investments (business plan).
The main indicators of the economic efficiency of investment projects include: firstly, net profit.
Secondly, cash flow (CF), calculated as the sum of net income + all non-monetary income of the project - all non-monetary expenses of the project. A simplified version of the calculation of CF involves the addition of net income and depreciation.
Thirdly, return on capital (simple rate of return):
where Pr– net profit from the project implementation;
I- the amount of investment costs for the implementation of the project.
The economic meaning of a simple rate of return is to assess what part of the investment costs is reimbursed (returned) in the form of profit during one planning interval.
Fourth, the payback period:
where R- net annual cash flow from the implementation of the investment project.
Fifth, the net present value of the project (NPV - Net Present Value) is the value of the net cash flow over the life of the project, given in a comparable form in accordance with the time factor:
where CF is the amount of money generated by the project in period t,
i- discount rate;
n– duration of the project period, years;
I 0 – initial investment costs.
If investment expenditures are made over a number of years, the NPV formula will take the following form:
where I t– investment costs in the period, t.
If NPV> 0 - the adoption of the project is expedient; NPV< 0 – проект следует отвергнуть; NPV= 0 – проект не является убыточным, но и не приносит прибыли. При рассмотрении нескольких вариантов осуществления проекта нужно выбрать тот, у которого NPV выше.
Sixth, the indicator of return on investment (profitability index) (PI - profitability index), is calculated when a larger NPV value corresponds to a larger amount of investment, by dividing the cash inflow over the entire period of the project by cash outflow. The more the profitability index exceeds 1, the more profitable the project.
Seventh, the internal rate of return IRR (Internal Rate of Return), corresponds to such a discount rate of the discounted cash flow, at which it is equal to zero, is determined from the equation:
If a IRR exceeds the average cost of capital in this industry, taking into account the investment risk of a particular project, then this project can be recommended for implementation.
Business value: income approach to business valuation, comparative approach to business valuation, cost approach to business valuation.
The market valuation of a business largely depends on its prospects. When determining the market value of a business, only that part of its capital that can generate income in one form or another in the future is taken into account. At the same time, it is very important at what stage of business development the owner will begin to receive these incomes and what risk this entails. All of these factors that affect the valuation of the business, allows you to take into account the discounted cash flow method (DCF). Determining the value of a business using the DCF method is based on the assumption that a potential investor will not pay for this business an amount greater than the present value of future income from this business. The owner will not sell his business for less than the present value of projected future earnings. This valuation method is considered the most appropriate from the point of view of investment motives, since any investor who invests in an operating enterprise, in the end, does not buy a set of assets consisting of buildings, structures, machinery, equipment, intangible assets, but a stream of income.
The income approach is based on the analysis of income brought by this business. There are two main methods:
The main method of the income approach is the discounted cash flow method. It is based on the fact that the investor will not pay for this business an amount greater than the present value of future income from it. Thus, the value of the business being valued is calculated as the sum of the cash flows from the business reduced to the current value. The discount rate can be the investor's required rate of return or the company's weighted average cost of capital. Therefore, according to the DCF method, the value of the business is equal to:
Business value =
where CF is the cash flow from the business being valued;
t is the year of the period under consideration;
r is the discount rate (weighted average cost of capital, capital asset valuation model or cumulative construction method);
n is the number of years of the period under consideration.
The second, less common method of the income approach is the profit capitalization method. It is used to value a business that has a large stable income stream. The value of the business being valued is determined as:
Business value = net income / capitalization ratio.
Net profit can be taken for the last reporting year, the first forecast year, or as an average for the last few years. reporting years, or consider earnings before taxes, or cash flow.
The capitalization ratio is treated as the discount rate minus the rate of growth in earnings or cash flow.
Comparative approach uses prices formed by the open stock market, that is, it is used to evaluate joint-stock company. It is necessary to find several similar enterprises recently sold on the market and compare their selling prices. Criteria for selecting enterprises of analogues:
level of financial risk;
stage of economic development;
Kind of activity;
Depending on the goals, object and specific conditions of the assessment, the comparative approach involves the use of three main methods: the method of an analogue company, the method of transactions, the method of industry coefficients:
Analog company method or capital market method. Here, the comparison base is the price of one share of a similar joint-stock company, that is, the method is used to evaluate non-controlling stakes.
The company's method of transactions or sales method, where the basis of comparison is the sale price of a similar enterprise as a whole, or a non-controlling stake. The price of a controlling stake is always higher than the simple sum of the prices of the shares included in this package, since in addition to the cost of shares it also includes a control premium, that is, an additional payment for the opportunity to implement one's own management policy for a joint-stock company.
To obtain the result in these two methods, price multipliers are calculated. Price multiplier- this is the ratio of the price of an analogue or one share of an analogue and some indicator, for example, revenue, net profit, and so on.
For example: evaluate a business if its net profit amounted to 10 million rubles in the last reporting year. A similar business was sold for 50 million rubles, its net profit for the same period amounted to 8 million 500 thousand rubles.
Multiplier = analogue price / analogue net profit = RUB 50 million / RUB 8.5 million = 5.88
The cost of business valuation = 5.88 * 10 million rubles. = 58.8 million rubles.
The method of industry coefficients, or the method of industry ratios, is based on the use of recommended ratios between the price and certain financial parameters. Industry coefficients are calculated on the basis of long-term statistical observations by special research institutes of the sale price of an enterprise and its most important production and financial characteristics. As a result of the generalization, quite simple formulas for determining the value of the enterprise being valued were developed.
Cost or property approach considers the value of the business in terms of costs incurred. Two methods are commonly used:
Net asset value method. The calculation includes several stages.
Estimated real estate businesses at fair market value.
Appraisal of machinery and equipment.
Intangible assets are appraised.
Determined market price short and long term investments.
Inventories are assessed.
Accounts receivable are assessed.
Deferred expenses are estimated.
The liability of the enterprise is translated into present value.
The value of the company's own capital is calculated as the reasonable market value of all liabilities.
Liquidation value method of the enterprise. Used in cases where:
An ownership interest is valued that is either a controlling interest or such a share that is capable of causing the sale of assets.
If the profitability is low or the company is unprofitable.
When the decision to liquidate the business is made.
The business is in bankruptcy.
There is a so-called "orderly liquidation", when the sale of assets goes on for a long time and there is an opportunity to get a high price. There is a "forced liquidation" where assets are distributed as quickly as possible.
The third type of salvage value is the cost of discontinuing the existence of assets. In this case, the assets are not sold, but written off and destroyed, and a new enterprise is being built in this place. To calculate the salvage value, the liquidation costs are deducted from the full replacement cost of the assets. These costs include commissions of realtors, appraisers, lawyers, severance payments to employees, transportation costs, and so on.
As a rule, the liquidation value of the business as a whole is less than the amount of proceeds received from the separate sale of assets.
