5.1. Methods for evaluating investment projects

Key principles for evaluating investment projects

The investment project consists in substantiating the economic feasibility, volume, timing of investments and contains design estimates developed in accordance with the legislation of Ukraine and approved standards, as well as a business plan.

The effectiveness of an investment project reflects the compliance of the project with the goals and interests of its participants. Evaluation of the effectiveness of an investment project in accordance with officially valid methodological recommendations should be based on certain principles.

There are two stages in the investment project evaluation scheme:

The effectiveness of the project as a whole, which evaluates the attractiveness for investors of capital investments in an investment project. At this stage, the following stages pass: assessment of the social significance of the project; evaluation of the commercial effectiveness of the project; assessment of the public effectiveness of the project;

Financial feasibility of the project according to the scheme of its financing. At this stage, the following stages are distinguished: checking the financial feasibility of the project; evaluation of commercial efficiency for each project participant; clarification of the financing scheme and determination of the expediency of participation in the project.

The most important principles for evaluating the effectiveness of real investment projects include:

Consideration and analysis of the project throughout the entire life cycle (from pre-investment research to project termination);

Modeling of cash flows (includes all costs and receipts related to the implementation of the project for the billing period);

Comparison of conditions for comparison of various projects;

The principle of positivity and maximum effect (when comparing

alternative investment projects, preference is given to the project with the greatest economic effect);

Accounting for the time factor (dynamics, gaps in time (lags), uneven costs or results at different times should be taken into account);

Accounting only for future costs and receipts (when calculating performance indicators, it is necessary to take into account only future costs and receipts during the implementation of the project, including the costs associated with attracting previously created fixed assets, as well as possible future losses caused by the implementation of the project);

Comparison of "project" and "without project" (comparison should be carried out not in the situation "before or after the project", but in the proposed version);

Accounting for all the most significant consequences of the project (economic, environmental, social, etc.); multi-stage assessment (at the stage of a feasibility study of the project, selection of a financing scheme, monitoring, etc.);

Accounting for inflation and risk factors when developing a project;

Accounting for the need for working capital for a newly created enterprise.

The principles are considered used by investors at all stages of the implementation of investment projects - pre-investment, investment and operational.

Methods for evaluating the effectiveness of investment projects

Evaluation of the effectiveness of an investment project is based on the calculation of a number of indicators. The timing of the return on investment and the prospects for the development of the enterprise depend on the validity of such an assessment. Among the indicators of economic efficiency, there are statistical ones that do not take into account the influence of the time factor, and dynamic ones based on discounting cash flows (Fig. 17.1).

At an operating enterprise, according to the latest balance sheet, it is possible to evaluate the effectiveness of funds advanced to non-current assets using the profitability indicator:

Rice. 17.1. V

where G. - return on investment,%;

PE - net profit remaining at the disposal of the enterprise after taxation;

B / 75 - the currency of the liabilities side of the balance sheet;

TO - short-term liabilities. The effectiveness of investing in non-current assets is evaluated in dynamics by comparing the results obtained with the data of the previous period. The analysis of the obtained indicators should be carried out taking into account the comparability of conditions, that is, the indicators should be cleared of the inflation component.

The payback period of investments (G70) is an inverse indicator of their level of profitability.

It is rather difficult to assess the effectiveness of real investment projects with a long payback period, because the calculation of investment indicators is based on the concept of evaluating the value of money over time. Western investors, as a rule, proceed from the advantage of the current value of money, because: there is a risk of non-repayment in the future of funds invested in the project; the funds available today can be invested in highly profitable current assets.

In a market economy, the criterion for the attractiveness of the project is the level of return received on invested capital. The profitability of the project is understood as such a rate of capital growth that fully compensates for the change in the purchasing power of money over a certain period, provides an acceptable level of profitability of the project and covers the risk of the investor associated with its implementation. In this regard, it must be stated that the problem of assessing the attractiveness of an investment project for an investor is reduced to establishing the level of its profitability.

To solve the problem of assessing the attractiveness of an investment project, two main approaches are used: statistical (simple) modeling and dynamic modeling based on discounting cash flows.

The following formula (17.3) is used to calculate the simple rate of return:

where Fri - simple rate of return,%; PE - net profit; / - initial investment in the project;

AO - depreciation charges generated by the project. The reverse indicator is the payback period of investments (G0), calculated by the formula:

When evaluating an investment project, the option with the highest rate of return and the minimum payback period is selected (Table 17.4).

This method is simple and reliable for projects completed within one year, as it ignores certain factors:

Non-monetary (hidden) nature of some costs (for example, depreciation);

Income from the sale of old assets being replaced by new ones;

The possibility of reinvesting the income received and the time value of money;

The inability to determine the advantage of one of the projects having the same rate of return, but different amounts of investment.

Table 17.4. V

In world practice, the following dynamic models are most widely used:

Net present value or net present value (Net Present Value, NPV)",

Profitability Index (PI);

Discounted payback period (DPP);

Vrіshnya rate of return (profit) of the project or the marginal efficiency of capital (Interal Rate of Return, IRR);

Modified Marginal Capital Efficiency Method (MIRR).

The method of net present value (NPV) allows you to get the most generalized characteristic of the result of the project, that is, the final effect in absolute terms:

where FV is the future value of cash income from the project (Future Value);

r - discount rate, fractions of a unit; d - settlement period, years (months). The discount rate is expressed as a percentage or fractions of a unit.

If NPV >0, then the project generates a higher rate of return than the weighted average cost of capital. In this case, the project can be accepted by the investor.

The calculation of the net present value (NPV) can be carried out according to the formula:

where RU is the present value of cash receipts from the project after discounting;

/ - the amount of investments (capital investments) aimed at the implementation of this project.

The discount rate (r) used to determine the RC is differentiated taking into account the risk and liquidity of the investment.

For consideration in relation to lending, a commercial bank received two business plans for alternative projects with the following parameters (Table 17.5). Conditions for the implementation of projects: capital expenditures are made at a time during the year; project lifetimes are different, so discount rates.

Table 17.5. V

In table. 17.6 shows the calculation of the present value of cash receipts for projects.

Table 17.6. V

Similar calculations are made for project No. 2. Based on the calculations, we determine the NPV for the projects:

So, comparing NPV across projects confirms that the second of them prevails over the first. NPVy is UAH 3.4 million (13.72-10.32), or 24.8% higher than in the first project.

However, for project No. 1, the amount of capital investments is UAH 5.0 million (35-30), or 14.3%, more, and the return in the form of future cash receipts is UAH 6.0 million (54-60) lower than in project number 2.

In the case of the implementation of project No. 1, its initiator needs to find additional funding (internal or external) in the amount of UAH 5.0 million. Therefore, he must choose the most appropriate option, taking into account the available financial possibilities.

The implementation of investment activities related to capital investments can be carried out in several stages. In this case, the calculation of L / RU is made according to the formula:

where L/RU1 is the net present value of the project with repeated investment costs;

RU(- the future value of cash flows from the project with an interval ґ of the total period of the project;

/(- the amount of investment with an interval t of the total period of the project;

r - used discount rate, fractions of a unit; t is the number of intervals (steps) in the total billing period.

Projects for which the net present value is negative or equal to zero are unacceptable for the investor, since they will not bring him additional income on invested capital. Projects with a positive value of this value allow you to increase the initially invested capital of the investor.

After the final study of all components, it is possible to determine real cash flows (CASH-FLOW, CF) for investment projects using the formula:

where CP is the net cash flow from the project;

PE - net profit remaining after tax; AO - depreciation; due to investment costs;

DZ - change in long-term debt (+ increase, - decrease).

Profitability Index (PI) is calculated using the formula:

where RU is the present value of cash receipts;

/ - the amount of investments aimed at the implementation of the project Let's determine the index of profitability (profitability) of the two projects considered:

Given the given parameter, the efficiency of the second project is much higher - by 0.17 points (or 11.6%).

The calculation of the profitability index when implementing investments in several stages is carried out according to the formula:

where PP is the index of profitability with repeated implementation of investment costs;

/, - the amount of investment in the interval r of the total period of the project;

RU, - the present value of cash receipts in the interval r of the total period of the project;

l - the number of intervals (fokіv) in the total billing period;

r - discount rate, fractions of a unit. If RU< 0, то проект не принимается, потому что не принесет инвестору дополнительного дохода. К реализации принимаются проекты с РУ& 1,0

One of the most common indicators for evaluating the effectiveness of projects is the discounted payback period of invested funds:

where ORU is the discounted payback period of the project, years; / - the amount of investments aimed at the implementation of the project;

Г~7, - the average amount of cash receipts in the period r. Let us determine the payback period for capital expenditures for the considered projects. To do this, set the average annual amount of cash receipts in the present value.

For project No. 1, it is equal to UAH 15.11 million (45.32:3).

For project No. 2, it is equal to UAH 10.93 million (43.72:4).

Taking into account the average annual amount of cash receipts, the discounted payback period is:

For project No. 1 = 3.0 years (35:15.11).

For project No. 2 = 2.7 years (30:10.93).

These data indicate the priority importance of project No. 2 for the investor.

The internal rate of return or marginal efficiency of capital (IRR) is the most difficult indicator for evaluating the effectiveness of real projects. This indicator characterizes the level of profitability (profitability) of the project. It is expressed as a discount rate at which the future value of cash flows (FV) is reduced to the present value of funds advanced (PV). In this case, the internal rate of return (IRR) can be calculated using the formula:

where NPV is the net present value of cash receipts; / - investments (capital investments) in this project.

The economic content of the IRR is that all income and capital investments on the project are brought to the present value based on the internal profitability of the project itself, and not on the basis of an externally set discount rate.

The payback option means that the internal rate of return is defined as the rate of return at which the present value of cash flows (CASH-FLOW, CF) from the project is equal to the present value of capital costs, that is, NPV = 0. In this case, IRR = r, while NPV= F) = 0.

If there is a timely receipt of capital investments in the project, then IRR can be calculated using the formula:

where СР (- the amount of cash receipts for individual intervals of the total period of project implementation;

HOW - the internal rate of return for the project, unit shares;

l - the number of intervals in the total billing period; t = 0 - zero (initial) period of capital investments.

In practice, project options are selected in which IRR > WACC.

At IRR< WACC проект считается неэффективным.

In our example (Tables 17.5 and 17.6), for project No. 1, it is necessary to find the size of the discount rate (r), at which the present value of cash receipts (UAH 45.32 million) for three years will be reduced to the amount of invested funds (UAH 35 million) . This bet is:

It expresses the internal rate of return for project No. 1. Its value (IRR) is higher than the average annual inflation rate (9.83% > 9.0%). Similarly, the IRR of project No. 2 is found:

The IRR of project No. 2 is also higher than the average annual inflation rate (11.43% > 9.0%). This indicator is worse than in project No. 1.

The Modified Marginal Effectiveness of Capital (MIRR) method is an improved IRR model. This method eliminates the problem of multiple rates of return at different stages of project evaluation and gives a more correct estimate of the discount rate. Its content is as follows:

1. At the weighted average cost of capital (WACC) rate, all project cash flows are converted to future value and added together.

2. At a single IRR rate, the amount received is reduced to the present value.

3. The NPV of the project is calculated as follows: the present value of the investment costs is subtracted from the present value of the income.

4. The real value of the internal rate of return (profitability) of the project (MIRR) is determined by the formula:

All the considered methods of evaluation enable the financial managers of the enterprise to study the characteristic features of the project and make the right decision.

The main criteria for making investment decisions include:

Lack of better options

Minimizing the risk of losses from inflation;

Short payback period of capital investments;

Low cost of the project;

Ensuring the stability of income from the project for a long time;

High profitability of investments in the activities of the enterprise;

High return on investment after discounting and the like. Using a variety of combinations in decision making,

the financial manager can accept a reasonable version of the project.

The real process of making managerial decisions requires a significant amount of information and a lot of financial calculations, which is reflected in the investment plans of the enterprise.

Investment Rules

Choosing a way to invest begins with a clear definition of possible options. First, they determine where it is more profitable to invest: in production, securities, the purchase of real estate, goods or currencies

Investment is a long process, therefore, when evaluating investment projects, it is necessary to take into account:

Riskiness of projects (the longer the payback period, the riskier the project)

The time value of money, as over time they lose their value;

The attractiveness of the project in comparison with other investments in terms of maximizing income and increasing the market value of the corporation's securities with a minimum level of risk, since this is the main goal for the investor.

The most important principles for making long-term investment decisions related to evaluating the effectiveness of real investment projects are as follows:

1. Consideration and analysis of the project throughout the entire life cycle (billing period) - from conducting pre-investment studies to terminating the project.

2. Modeling of cash flows, including all related expenses and receipts for the billing period, taking into account the possibility of using different currencies.

3. Comparability of the conditions for comparing various projects (project options).

4. The principle of positivity and maximum effect. For the project to be accepted by the investor, it is necessary that the effect of its implementation (income or profit) be positive

5. Taking into account the time factor in project evaluation, including the dynamism (change over time) of the project parameters and its economic environment.

6. Accounting only for future expenses and receipts

7.Comparison "with the project" and "without the project"

8. Accounting for all the most significant consequences of the project (economic, environmental, social, etc.).

9. Taking into account the divergence of interests of various project participants and unequal estimates of the cost of capital, which is reflected in the individual values ​​of the discount rate to bring the future value of cash flows to the present value. ,

10. Multi-stage assessment at the stages of justification of capital investments, development of feasibility studies (feasibility study), selection of project financing schemes.

11. Accounting for inflation and risk factors when developing a project, as well as the possibility of using several currencies in its implementation

The calculation of working capital requirements when developing an investment project and evaluating its effectiveness differs from similar financial calculations for current activities, which is due to differences in cost accounting: production and financial results, as well as the need to more accurately take into account the time factor.

To achieve a higher efficiency of investments, the management of the enterprise must take into account basic principles of investment and evaluation of investment projects . Let's consider them in more detail.

The principles for evaluating the effectiveness of investment projects can be quite clearly divided into three structural groups:

- methodological - these are the most general, related to the conceptual side of the matter, the "philosophy" of the assessment and little dependent on the specifics of the project under consideration;

- methodical - these are principles directly related to the project, its specifics, economic and financial attractiveness;

- operational are principles that facilitate the evaluation process from an information-computational point of view.

Methodological principles include:

1)measurability . The effectiveness of the project is characterized by indicators expressed in a quantitative scale, i.e. numbers. This means that all the main characteristics of the project that determine its effectiveness must be quantified.

Results (economic and non-economic);

Costs (of all types: one-time, current, etc.);

2)Comparability . If we compare two investment projects, that is, there is always one, and only one, of the three results: the first project is preferable to the second, the second is preferable to the first, both projects are equally effective (equally preferable).

In order for the results of the comparison of projects not to contradict the rules of rational economic behavior, it is necessary to fulfill the following requirements of monotony, asymmetry, transitivity and additivity.

3)profitability . A project is considered effective if the implementation of this project is beneficial to its participants. This means that the costs associated with the implementation of the project are estimated no higher than the results obtained. Tem thus, the evaluation of the project's effectiveness is based on estimates of the costs and results of the project, presented in quantitative (numerical) terms.

4)Paid resources . When evaluating the effectiveness of projects, the limited nature of all types of reproducible and non-reproducible resources (economic benefits) and the unlimited need for them should be taken into account. This means that each resource required for the implementation of the project, in principle, can be used in another way, for example, in another project. Therefore, an important task is to choose the most efficient use of the resource and select the appropriate project.

5)Non-negativity and maximum effect . Comparison of any projects should be carried out according to a single criterion, despite the fact that, in the general case, projects are characterized by a system of performance indicators. Such a criterion is integral effect - reflects the difference between estimates of the total results and costs of the project for the entire period of its implementation. The project is considered as inefficient if the integral effect of its implementation is negative, and as effective if it is positive. At the same time, the inefficiency of the project does not necessarily mean unprofitable investments, but only indicates the possibility of a better use of the resources used in the project. When comparing alternative projects, preference should be given to a project with a large value of the integral effect.

Methodological principles include:

1)Comparison of situations "with a project" and "without a project" . Evaluation of the effectiveness of the project is carried out by comparing the consequences of its implementation with the consequences of abandoning it. This principle does not allow evaluation of the project by comparing the situation "before the project" and "after the project", as well as ignoring the situation "without the project". At the same time, the situation "before the project" characterizes the conditions under which the project begins to be implemented, and its accounting is necessary.

2)Suboptimization . Evaluation of the effectiveness of the project should be carried out at the optimal values ​​of its parameters. When evaluating the effectiveness of a project, it is always possible to vary one or another parameter (from construction decisions to a financing scheme). At the same time, the best combination of such parameters should be taken as the basis for the assessment. This, however, does not mean that those values ​​of the parameters that provide the greatest effect to the investor should be taken as optimal - if there are several participants in the project, then the optimal combination of parameters should ensure the profitability of the project for each of them.

3) Uncontrollability of the past . When evaluating projects, cash flows should not reflect "past costs" and "past incomes" incurred before the start of the billing period, even if these costs or incomes were directly related to the preparation for the implementation of this project.

4)Dynamism (taking into account the influence of the time factor) . When evaluating the effectiveness of projects, it is necessary to take into account the time factor, the influence of which can manifest itself in different ways:

a) In the course of project implementation, the structure and nature of facilities, technical and economic indicators of enterprises, fixed assets and technological processes, and other parameters of the project may change.

b) Characteristics of the economic environment (prices, exchange rates, tax rates) may change over time. Rising prices for products and resources are covered by the concept of "inflation".

c) There may be gaps in time (lags) between the production of products or the consumption of resources and their payment. Some types of lags can be accounted for by including in cash flows the costs of creating or increasing working capital.

5)Time value of money . Evaluation of the effectiveness of the project involves comparing the results of the project with the projected costs in conditions where both the results and the costs are distributed over time. This means that in efficiency calculations, costs and results at different times must be commensurate in a certain way - brought to the same point in time. This takes into account that the results (costs), equal in magnitude, but achieved at different points in time, are not equivalent. Getting the (same) results earlier or incurring the (same) costs later makes the project preferable and improves its performance. The relative decrease in the value of costs or results with their later implementation is characterized by a specific economic standard - discount rate expressing the time value of money. The preference for earlier results and later costs also leads to the inefficiency of delays: an effective project becomes less effective when its implementation is delayed for some time.

6)Incomplete information . Evaluation of the effectiveness of the project is always carried out in conditions of uncertainty, that is, incompleteness and inaccuracy of information about the project itself, the conditions for its implementation and the external environment. Therefore, the implementation of the project may be fraught with risk for its participants. This should be taken into account when developing the project, preparing the initial information, in the process of calculating the effectiveness, as well as when interpreting the results.

7)Capital structure . The capital used in the project is not homogeneous; usually part of it is own (sharehold), and part is borrowed. Meanwhile, these types of capital differ significantly in a number of characteristics, primarily in the degree of risk. Therefore, the capital structure is an important factor influencing the discount rate and, consequently, the valuation of the project.

The operating principles are:

1)Relationship of project parameters . When developing and evaluating various project options and generating initial information about its economic, technical, organizational or some other parameters, it must be taken into account that a change in any one of the parameters, as a rule, causes a change in others. In this regard, such changes, even in cases where they seem to be of a local nature, should be considered and taken into account in the same way as if we were talking about evaluating the effectiveness of a new project.

2) Modeling . Evaluation of the effectiveness of the project is carried out by modeling the process of its implementation, taking into account the dependencies between the interrelated parameters of the project and the external environment. Ultimately, such modeling comes down to converting time-distributed costs and results into cash flows (revenues and expenses) expressed in common cost meters, and calculating project performance indicators based on these flows.

3)Multi-stage evaluation of project effectiveness . The development and implementation of the project are carried out sequentially, in several stages ("justification" of investments, feasibility study, selection of a financing scheme, economic monitoring). At each next stage, the initial information about the project and the external environment is updated and replenished, and the composition of alternative project options is also changed. Therefore, the evaluation of the effectiveness of the project and the choice of its best option each time must be made anew, using more and more accurate methods.

4)Informational and methodological consistency . When comparing different projects (project options), it is necessary to ensure the consistency of the initial information and methods for assessing their effectiveness. In particular, the composition, methods for determining and units of measurement of the types of results, costs and performance indicators taken into account, the regulatory framework used and information about the parameters of the external environment should be agreed upon.

5)Simplification . If there are several evaluation methods leading to the same result, then the simplest from the informational and computational points of view should be chosen. In the same way, the results of the calculations must be presented in the most visual and simple form.