Often this indicator is called the profit-cost ratio, that is, “benefit-cost-ratio”. In practice, if NPV is greater than zero, then the return on investment parameter will also exceed the minimum acceptable level (one). It is believed that if, as a result of the calculation, the parameter turns out to be greater than one, then the project can be worked on and it will bring .

Using PI, you can determine not only the prospects of certain investments, but also evaluate two more important aspects :

See the real “margin of safety” of investments. For example, if the PI indicator for a particular project is two, then it will lose its attractiveness only if revenues decrease by more than half. Thus, he sees how “durable” it is, and what can be expected from it in the future;

The PI indicator allows entrepreneurs and analysts to evaluate investments from the standpoint of attractiveness. By the way, if the calculated indicator was higher than the minimum acceptable return on investment, but the project was postponed, then they may return to its implementation in the future.

3. According to the method of calculating the internal rate of return. The calculation principle is based on calculating the return on investment ratio - Internal rate of return (IRR). As a result of the calculation, the investor sees how quickly a particular project can pay off. In formal terms, IRR is calculated according to the same principle as (NPV equals zero). It is assumed that the assessed investment project does not provide the expected increase in the value of the company, but does not lead to its growth either.

After calculation, the IRR is compared with the level of return on investments that you choose for yourself as basic (standard). This level of profitability is called the “hardle rate” (barrier coefficient).

Further comparison is made according to a simple principle. If the IRR parameter is greater than HR, then it will be profitable, and the project itself can be accepted for work. If less, the project is rejected. If the indicators are equal, then any decision can be made.

Minimum acceptable return on investment: calculation features

To understand the prospects of a project, an investor must evaluate the return on investment and compare it with the minimum acceptable parameter. As a rule, to solve a problem it is necessary to calculate the profitability of investments in a startup, an existing project or a marketing campaign.

In addition to the “profitability index”, another parameter must be calculated - ROI (return on investment). Using this indicator, you can see how profitable an investment in a specific project will be. In practice, “return on investment” is called differently - return, return on investment, and so on.

The return on investment ratio is primarily important for people who finance projects (invest in them). If you monitor changes in this indicator and promptly respond to its decline, you can increase the efficiency of your investments and reduce the risk of losing your funds to a minimum. In addition, it is possible to distribute budget funds more efficiently and analyze sales performance.

The ROI ratio helps to evaluate the profitability of each specific investment. The parameter is expressed as a percentage, and its analysis is carried out taking into account the minimum acceptable return on investment for each company. If the calculated parameter is more than 100%, then we can talk about the potential profit of the investment. If the indicator is lower, then the profit cannot be returned.

To carry out calculations, the following parameters are required:

scope of its application and calculation methodology

In addition to the net present value indicator, the return on investment indicator is widely used in medium-sized enterprises to evaluate the effectiveness of a design solution. We can say that both indicators are of the same nature and reflect the same essence, but only from a different angle.

Economic meaning of the indicator return on investment is that it reflects the share of net present value per unit of investment discounted at the beginning of the life cycle of the project. This ROI is calculated using the formula

In this formula, all indicators and parameters have the same economic meaning as in formulas 8.6 and 8.7.

If we substitute the initial information of the example discussed in the previous paragraph into this formula, then at the discount rate q n = 0.06 return on investment will be P = 0.0804. This result is obtained by dividing the value of 5131.71 by the value of 4749.99. Then, one is subtracted from the quotient of the indicated values ​​and the desired return on investment is obtained - 0.0804.

What characterizes the result obtained, what is its economic meaning? It means that by applying this option, the investor will fully return his investment investments over the life cycle of the project and, in addition, will receive a net present value of approximately 8% of the advanced payment amount.

The noted calculation result is also shown on the graph (Fig. 8.1). If you move along the curve to the left and up to the origin, then the return on investment in this case will be P = 0.8234. This means that without taking into account the time factor and lost profits, insurance and the minimum established profitability of the project, the return on investment will be approximately 82.3%, i.e. spending 100 den on the project. units, the investor after its completion will receive a full income of 182.3 den. units.

8.4. Indicators of the payback period of investments

and new business

One of the most important indicators of investment efficiency for small businesses is the payback period of investments, because for an entrepreneur who does not have a lot of capital, it is very important to return the funds contributed to the business as quickly as possible. Therefore, very often, when deciding whether to invest, an entrepreneur focuses primarily on assessing the return on investment.

The economic essence of the payback period indicator comes down to the following. Let’s assume that an entrepreneur invests 100 deniers in the project. units. As a result of the operation of the project being implemented, he receives 25 den each year. units. Consequently, the entrepreneur will return his advanced financial resources in four years. Such information is of great interest to him; it shows whether it is worth investing money in this business and how quickly it will return to him.

Business practice has developed several indicators of the payback period of investments, and each of them has its own purpose and reflects some aspect of the project’s effectiveness.

Payback period of investment. The essence of calculating this indicator can be illustrated in the graph (Fig. 8.2).

Fig.8.2. Determining the payback period of investments

The abscissa axis shows the current time in accepted time intervals (in years, half-years, quarters, months, etc.). The ordinate axis shows investment investments on an accrual basis in the accepted currency and income received in the same currency and also on an accrual basis. There comes a moment when both curves intersect. The point of their intersection will determine the payback period of the investment. In the presented figure, this indicator is 6.5 time intervals. It is obtained based on the following data accepted by condition:

In addition, it is known that the operation of the project begins from the second time interval.

As can be seen from the figure, the income component of the project intersects its investment component on the graph exactly after 6.5 time intervals. This means that through income from the operation of the project, the entrepreneur will return his investment exactly within the specified period.

(8.9)

where K i- investment in the project in i om time interval;

D i- income of the entrepreneur from the operation of the project in i-th time interval;

t - the number of time intervals for the operation of the project, during which the total investment will be equal to the amount of income from the operation of the new business (this will be the required payback period for the investment).

In the example considered, the total investments, as follows from the graph, will exactly equal the amount of income from the operation of the project after 6.5 intervals, which fully corresponds to the conditions of formula 8.9.

Payback period of the existing project (facility). The payback period for an object differs from the payback period for investments. This difference is due to the fact that the operation of the project begins somewhat later than the investment investments begin. Consequently, the payback period of the object (i.e., a functioning project) will be less than the payback period of the investment.

The value of the payback period of an existing facility can be determined by the formula

t o = t ― ∆ t,(8.10)

Where t o is the payback period of the operating facility in selected time intervals;

t - payback period for investment in the project (in the same time intervals);

∆t - time from the start of investment to the start of operation of the project (in the same time intervals).

If we use the condition of the example presented on the graph, then we can state that the payback period of the operating facility will be, according to formula 8.10, equal to 4.5 time intervals. This value is the difference between the payback period of the investment (6.5) and the shift in the start of operation of the facility (2.0).

The considered indicator characterizes the time reserve that each entrepreneur has to reduce the payback period of investments. He just needs to find such opportunities, the implementation of which will allow him to quickly start operating the project.

Income growth rate. The essence of the income growth rate (Fig. 8.3) comes down to the following.

Fig.8.3. Options for increasing income

with the same payback period

Let’s assume that when implementing a new business, the payback period for investments is ensured in 8 time intervals, and income increases evenly during the operation of the project, i.e. In each time unit, the total income increases on an accrual basis by the same amount. In this case, it can be stated that the resulting income component is linear in nature (line FD on the graph). But this nature of income growth will not necessarily be present in all cases of entrepreneurial business. It all depends on the scale of the future business, the adopted production technology, the possibility of mastering it, the qualifications of the personnel used in production, the speed of sales of goods to consumers and other factors.

Therefore, the nature of the increase in income of an entrepreneurial project can and will actually differ from a proportionally linear nature. For example, it could be as shown by the curve FGD or curve FHD. It is not difficult to understand that with the same payback period for investments (as is accepted according to the condition of eight time intervals), in all three recorded cases, the nature of the increase in income will be qualitatively and quantitatively different. The best option for an entrepreneur, of course, will be the one of the three considered, which will allow him to quickly return the advanced funds and, therefore, use them for the further development of his business. This is the option FGD, whose income will grow very quickly and progressively from the very beginning of the project’s operation, gradually slowing down towards the end of the payback period. The worst option would be FHD, in which the development of the project will initially proceed at a slow pace and gradually increase by the time the payback period arrives. The option will be intermediate in quality FD.

Naturally, differences in the quality of return on advance investments must be expressed quantitatively, somehow assessed using a specific indicator. This is necessary in order to be able to choose investment options more accurately, to be able to identify existing reserves for improving the use of investments, and to consciously manage the process of developing a new business.

The economic meaning of the proposed indicator, characterizing the dynamics of income growth, can be considered using Fig. 8.4.

Fig.8.4. Options for increasing income

Figure ABCDEA (has a horizontal hatch) represents the area of ​​investment of investments on an accrual basis, and the figure FDEF- the area of ​​increase in income from the operation of a new business (has vertical shading). Dot D there is a point at which the investment and income lines intersect, which will determine the time during which the payback period for the investment occurs. Then, according to the schedule, we will have:

line segment AE - duration (term) of return on investment;

line segment F.E. - duration (term) of the object's payback;

line segment A.F.- the period of time from the start of investment to the start of operation of the project.

To determine the growth rate of income, it is necessary to take the ratio of the area of ​​the figure FDEF to the area of ​​the figure ABCDEA. This condition can be represented as a formula:

(8.11)

where K d  coefficient of increase in income during the operation of an entrepreneurial project;

S d - area of ​​the figure characterizing the increase in income;

S and is the area of ​​the figure characterizing the dynamics of investment.

Of course, the efficiency of investments, other things being equal, will be higher, the greater the coefficient of increase in income, and the latter will be the more significant, the more significant the numerator. S d and the smaller the value the denominator of the formula takes S And.

From the figure in question it is clear that of the three options for increasing income, the best is the top one (it has the largest area of ​​the figure FDE), then the middle option, and the worst option is the bottom option. At the same time, as can be seen from the figure, the payback period for all options is absolutely the same.

How to determine the area of ​​the studied figures? For this, two methods can be proposed - graphical and analytical.

To use one or another method, it is necessary to have information about investments and the amount of income in each time interval. This information is necessary and sufficient to determine the growth rate of business income.

With this information, you can build a graph similar to the one shown in Fig. 8.4. It is best to construct a graph on graph paper to obtain more accurate results of calculating the required coefficient and simplify the procedure for determining it.

For the same purposes, you can apply the analytical method of calculating the income growth rate, using geometric constructions, dividing each complex figure into rectangles and triangles. Then the areas of the resulting figures are determined, and the results are summarized. This problem can also be solved using a computer program.

Let's perform a comparative calculation of determining the income growth rate with the following initial data.

Let there be an investment project, the implementation of which will require 50 money. units over three time intervals. The project can be implemented using various technological and organizational options that will provide a certain variety of income dynamics. Data on the amount of investment and income by time intervals are given in table. 8.2.

The indicators presented in table. 8.2, calculated using the author’s computer program “Invest-Credit” and reflect the considered theoretical justification for the income growth rate. As can be seen from the table, the coefficients are calculated for six options. Of the first three, the first option has the best result (it has accelerated receipt of income from the moment the project begins operation), the third option has the worst result. Its income growth rate is the lowest, since the beginning of the project’s operation is accompanied by low income and only towards the middle and at the end does income increase.

Table 8.2

Indicators of investment investments and income dynamics by time intervals

Sequence number of the time interval									Coefficient growth income
Investment payments, den. units
Options income dynamics

Similar results are observed for the next three options. The best option here is the fourth, the worst is the sixth option. However, as can be seen from the table, in terms of the income growth rate, the first three options are significantly worse than the subsequent options, since options 4, 5 and 6 begin to be used one time interval earlier than the first three. Such a time shift has a beneficial effect on the calculated indicator, because in this case the denominator of formula 8.11 decreases, while the numerator remains unchanged.

As follows from formula 8.11, a higher growth rate of income occurs when the numerator increases S d and reducing the denominator S And . Let's consider what determines the most favorable relationship between the numerator and denominator of the specified formula.

This is, firstly, better preparation of the project for operation through the use of advanced technology, more advanced equipment, organization and production management. Under such conditions, the implementation of the project will allow us to quickly develop the production capacity of the business and receive very high incomes from the very beginning of its operation.

Secondly, an effort to put the project into operation as quickly as possible, while reducing the time from the beginning of the investment period to the start of operation of the business. This depends on the technology of pre-investment operations and the possibility of combining their implementation with the operation of the project itself.

In conclusion, it should be noted that the income growth rate indicator has no independent meaning, but is only an additional indicator of investment efficiency, the use of which allows you to clarify the decision made and reveal existing reserves for increasing the return on investment.

Return on investment is an indicator of economic efficiency that allows the asset holder to determine the prospects of the chosen area of ​​investment.

Profitability is measured in absolute and relative values. The former represents the actual profit (loss) without taking into account the size of the investment, and the latter represents dividends or losses as a percentage of the amount invested. Relative profitability gives a more accurate forecast, so this indicator is more often used when analyzing the profitability of an investment object. The term is referred to as ROI - return on investment.

Methodology for calculating return on investment

ROI is the ratio of the total profit received during the period of ownership of the financed asset to the amount of funds invested in it:

Incom - the actual cost of investments at the end of the period under study, estimated by the discounting method; P1 is the profit received from manipulations with the asset, minus the associated costs of marketing and maintaining the property; P0 is the amount of capital investment.

The payback ratio is recalculated several times:

• At the stage of preliminary assessment of the profitability of a specific investment asset. The coefficient is calculated based on publicly available information on the selected investment object, the experience of completed projects and expert forecasts of the expected economic effect.
• At the time of investment. The audit is carried out to describe changes in the company’s economic indicators and find ways to optimize them.
• At the end of each reporting period. As a rule, payback is assessed in parallel with the closing of the annual balance sheet.

This approach ensures the receipt of complete, detailed and reliable data on each investment asset, which allows you to make effective decisions on its further disposal.

The difficulty in calculating coefficients lies in estimating the size of future cash receipts and discounting them. Difficulties arise due to fluctuations in the value of assets occurring due to changes in regulator discount rates, jumps in market prices or seasonal changes in consumer demand.

Optimal ROI values

The optimal ROI values ​​are those that exceed the standard indicators of the industry return on investment ratio:

• for trade - more than 25%;
• for construction - over 22%;
• for industry - no less than 16%;
• for agriculture - from 12%.

If the payback index is less than the predicted profit from a risk-free investment, the investment is considered unprofitable. In this case, it is necessary to take measures to increase the profitability of the asset: increase cash flow, optimize costs and increase the efficiency of its economic activities as a whole.

Calculating return on investment is a procedure necessary for competently assessing financial risks when choosing projects for investment. An audit allows you to determine the potential profitability of assets, highlight the most promising areas and minimize investment risks.

What is ROI? This is the use of funds in which not only costs are covered with income, but also profit is made. The profitability or profitability of any enterprise is assessed by relative or absolute indicators. Relative characterize the profitability itself, and are also measured as a coefficient or as a percentage. Absolute show profit and are therefore expressed in monetary units.

One way or another, such indicators are always influenced by inflation, and not by the amount of profit, since they are expressed by the ratio of capital and profit or costs and profit.

If you make a calculation, be sure to compare the calculated ROI with planned figures and indicators of previous periods or other organizations. Then you will be able to determine for yourself the effectiveness of using your funds that were invested in the development of any enterprise.

Today there are several interpretations of this concept. The presence of different formulas is possible, first of all, due to differences in the calculation of the indicator. Today experts identify three main formulas:

1. The ratio of income before taxes and interest to sales volume, multiplied by the ratio of sales volumes and company assets;
2. percentage indicator of profitability of sales multiplied by the turnover of the enterprise's assets;
3. The ratio of interest and pre-tax income to a company's assets.

In any of the above cases, the basis for improving the return on investment (financial performance indicator) remains an increase in asset turnover, as well as an increase in the level of profitability of product sales.

How to calculate profitability correctly?

So, in order to determine the return on your investment, you must conduct a study of all the resources invested. The analysis of all your investments involves several stages.

At the first stage, you prepare a financial analysis of the company. On the second - you carry out a forecast calculation of the investment amount, on the third - the calculation of all the main indicators of the effectiveness of deposits, taking into account the impact of such risk factors as the influence of inflation, difficulties with possible implementation, etc.

ROI = (Income from investments / volume of deposits) * 100%

Consider the fact that many commercial organizations use different criteria to determine investment or income. In any case, not so much the absolute calculated indicator will be taken into account as its dynamics.

That is why, if you are going to do the calculations, remember that the level must exceed the interest on the overdraft loan, as well as the income from the pre-tax risk-free investment recorded.

To improve the income from your investments, you need to increase the growth of asset turnover, as well as the profitability of sales of marketable products.

Acceptable degree of profitability

As we mentioned above, this figure must exceed the profit from a risk-free investment. What does it mean? This could be, for example, shares in construction companies, and the profit must be established before all taxes are paid, as required by the standard rate. Otherwise, most of your profits will be earned only by investing and earning interest on your investments.

If the overdraft rate exceeds the income, the income will not be able to offset the entire cost of borrowing the investment.

As practice shows, the indicator should always be significantly higher, since you must take into account compensation both for the management resources involved and for all risks taken. The acceptable operating assets ratio must reach at least 20%.

Examples of profitability calculations

Example 1

Every year you spend about $1,000 on advertising in a well-known magazine. Every time a new client comes to you, you ask him how he heard about you. Note for yourself those cases when the main source was advertising in the magazine. At the end of the year, having calculated all the data, you will find out that advertising brought you $5,000 in income, which means the return on your advertising investment can be calculated as follows:

(Money earned/money spent) *100% = (5000/1000)*100%=500%

This means for every dollar you spend on advertising, you get $5 in profit.

Example 2

You want to invest your money in purchasing shares of Sberbank of Russia. Your investment does not exceed $100. Your shares rise to $110. How to make a calculation?

(Money earned / money spent) *100 = (110/100)*100=110%

This means that for every dollar you invest, you get a return of 110%, i.e. +10 cents profit.

(Money earned / money spent) *100 = (36,000/30,000)*100=120%

This means that for every ruble you invest, you get a profit of 120%.

Now you know how to make such calculations yourself. This will help you know if your investment was profitable. If not, you have a chance to increase your profits.

The Accounting Rate of Return (ARR) is calculated in several ways.

Formulas for calculating the efficiency indicator of an investment project ARR :

Method 1. The ratio of the average annual investment profit without taking into account deductions (for example, tax payments) for a certain period of time and the average investment size is calculated.

I av0 - the average size of the initial investment, taking into account the fact that after the end of the investment period, all capital costs are written off.

Method 2. The profitability ratio of an investment project is calculated as follows:

P r - average annual investment profit excluding deductions;

I 0 - the size of the initial investment.

This calculation formula is used for investment programs for which income is received evenly over a fairly long or unlimited period, for example, an annuity.

The advantage of this indicator is the ease of calculation. However, this efficiency coefficient, similar to PP, does not take into account the change in the value of funds during the investment period, which does not make it possible to evaluate and compare programs of different durations. Therefore, it is often used to evaluate short-term projects.

Dynamic performance indicators of an investment project

Analysis of dynamic performance indicators is carried out taking into account a number of factors:

• - change in the value of monetary resources;
• - the amount of additional or alternative costs;
• - the probability of changes in the initial parameters of the investment program;
• - inflation rate during the project implementation period;
• - riskiness of investments.
• 1. Net present value (NPV).

Net present value is the difference between discounted income and discounted expenses incurred as part of the investment process over the expected period.

Discounting is the recalculation of the future value of money taking into account its current value.

Formulas for calculating the efficiency indicator of an investment project NPV :

1. The investment project provides for a one-time tranche of funds

I 0 - the size of the initial investment;

t - time interval (month, quarter, year);

2. As part of the investment project, funds are invested in parts

I t - the amount of investment over a period of time;

C t - cash receipts (flow) from investments at time t;

t - time interval (from a month to several years or more);

i is the discount factor.

An investment program is taken into development if the NPV value is more than zero, but if the value of the indicator is equal to or less than zero, then the project is not accepted, since with a zero value it will not bring income, and with a lower value it will bring losses. When comparing different investment projects, the one whose NVP value is greater is selected.

If an investment portfolio is created, then NPV is calculated separately for each investment direction, and then summed up to determine its overall value for the entire portfolio.

Disadvantage of the indicator: difficulty in choosing a discount factor. The consequence of incorrectly setting the coefficient is an underestimation of the riskiness of investments. Thus, each calculation period is assigned its own discount factor, and if with a constant factor the calculation result meets the requirements, then with a variable factor the result may not satisfy the evaluation criteria.