Analysis of realization of investment projects models

Livandovskiy V. V.

INTRODUCTION

Under investments the purposeful investment is understood on the certain term of capital in all his forms in different objects for achievement of aims of investors.

The operations, related to the investment of monies facilities in realization of projects which will provide the receipt by the firm of benefits during the certain period of time, are one of major spheres of activity of any firm. The result of such investment projects can, for example, be:

• development and issue of certain products for satisfaction of market demand;
• perfection of production of the produced goods on the base of new technologies and equipment;
• upgrading the produced products;
• creation of new productions;
• going into new markets;
• grant of different sort of services, etc.

Reading a previous indention attentively, it is possible to make sure, that the investment analysis must stand on the first place in the spheres of activity of any firm, enterprise, sole proprietor, and etc As without the detailed consideration of investment projects, an investor can bear considerable losses, that is the back of activity of any firm, and will result in liquidation of firm or severe financial losses. Thus, actuality of this theme in our time does not cause large questions, and, vice versa, gives a stimulus it is fine to capture the instruments of investment analysis.

The study of concept of investments is the purpose of this work, what part they act in the today's environment of business, what principles methods and indexes are used for the analysis of investment projects, and also as these indexes and what additional factors are calculated is examined at estimation of efficiency of investment projects. On the basis of the got knowledges from different sources the software product related to the analysis of models of realization of investment projects will be realized in future.

The economic evaluation of any investment project must necessarily take into account the features of functioning of market, in particular mobility of many parameters characterizing a project, vagueness of achievement of eventual result, subjectivity of interests of different participants of project and, as a result, multiplicity of criteria of his estimation.

BASIC ELEMENTS OF ANALYSIS OF INVESTMENT PROJECTS

Initial condition of investing of capital is receipt in the future economic return as the monies receipts sufficient for compensation of the originally invested expenses of capital, during the term of realization of investment project.

To judge about the attractiveness of any investment project, it is necessary to consider four elements:

• volume of expenses – investments
• potential benefits as the monies receipts from economic activity
• economic term of life of investments, I.e. period of time during which the invested project will bring a profit;
• any freeing of capital at the end of term of economic life cycle of investments is a liquidating value.

The economic analysis of these four elements allows to estimate the attractiveness of investment project.

METHODS OF ESTIMATION OF INVESTMENTS

Formula of compound interests:

In the most general view sense of concept the «value of monies in time» can be shown a phrase is a rouble today stands more than rouble which we will get in the future. The rouble got today, can be immediately inlaid in business, and he will bring in return. Or he can be laid on the bank account and to get a percent.

where FV is future size of that sum which we invest in any form today, and by which we will dispose through the period of time interesting us;
PV is a current (modern) size which we invest;
Е is the size of profitableness of investments;
k is number of periods of time, during which investments will participate in a commercial turn.

It is visible from the resulted formula, that for the calculation of future cost (FV) compound interest is used. It means that the percent charged extra on a primary sum is added to this primary sum and on him a percent is also charged extra.

Discounting

To define the present (modern) value (PV) of the deferred incomes and expenses, we use the formula of compound interests:

Consequently, a present (modern) value is equal to the future cost, increased on a coefficient , urgent by a discount factor.

Discounting is the process of adduction (adjustments) of future value of monies to their present (modern) value.

Future cost of annuity

Annuity is the special case of money stream, i.e. this the stream in which the monies receipts (or payments) in every period are identical on a size.

The future cost of аannuity can be expected on a formula:

where FVA_k is future cost of annuity;
PMT_t is the payment carried out at the end of period of t;
Е is the level of profit;
k is number of periods which a profit turns out during.

The present value of annuity is determined on a formula:

BASIC INDEXES OF EFFICIENCY OF INVESTMENT PROJECTS

The basic indexes of efficiency of investment projects can be united in two groups:

1. Indexes not supposing the use of conception of discounting:

• simple term of return on investments;
• indexes of simple profitability of investments;
• clean monies receipts;
• index of profitableness of investments;
• maximal money outflow.

2. Indexes determined on the basis of the use of conception of discounting:

• net present value;
• index of profitableness of the discounted investments;
• internal rate of profitableness;
• term of return on investments taking into account discounting;
• maximal money outflow taking into account discounting.

Simple term of return on investments

The simple term of return on investments names duration of period from an initial moment to the moment of recoupment. Usually beginning of the first step is an initial moment or began to operating activity. The moment of recoupment names that most early moment of time in a calculation period after which the cumulative current clean monies receipts become in future remain unnegative.

The formula of calculation of term of recoupment looks like:

where РР is the term of return on investments (years);
K₀ are primary investments;
CF_cг are average annuals monies receipts from realization of investment project.

Indexes of simple profitability of investments

The index of accounting rate of return is reverse on maintenance to the term of recoupment of capital investments.

The accounting rate of return reflects efficiency of investments as the percentage ratio of monies receipts to the sum of primary investments:

where the ARR is accounting rate of return investments,
CF_сг are average annuals monies receipts from economic activity
К₀ is the cost of primary investments

Net value

Net value name the accumulated effect (balance of money stream) for calculation period:

where П_m - influx of monies facilities on m step;
О_m - outflow of monies facilities on m step.

Adding up spreads on all steps of calculation period.

Index of profitableness of investments

Index of profitableness of investments is relation of sum of elements of money stream from operating activity to the absolute value of sum of elements of money stream from investment activity. He is equal to attitude of net value megascopic on unit toward the accumulated volume of investments.

Formula for determination of index of profitableness:

Thus, the index of profitableness is not that other, as index of profitability of investments, certain in relation to the total indexes of net value and investments for the economic term of their life.

The index of profitableness of investments exceeds 1, even if only if for this stream the clean monies receipts matter positive.

Maximal money outflow

The maximal money outflow is the maximal value of absolute value of the negative accumulated balance from investment and operating activity. It is also named the necessity of financing.

The size of necessity of financing shows the minimum volume of the external financing of project, necessary for providing of his financial realized.

Net present value

A net present value is the major index of efficiency of investment project the accumulated discounted effect for calculation period. A net present value settles accounts on the following formula:

where П_m - influx of monies facilities on m step;
- size of outflow of monies facilities on m step without the capital investments (investments) of К_m on that step;
- discount factor on m step

Thus, a net present value shows, whether will attain an investment for the economic term of their life of the desired level of return:

– the positive value of net present value shows that for calculation period the discounted monies receipts will exceed the discounted sum of capital investments and will the same provide the increase of value of firm;

– vice versa, the negative value of net present value shows that a project will not provide the receipt of normative (standard) norm arrived and, consequently, will result in potential losses.

Index of profitableness of the discounted investments

Index of profitableness of the discounted investments is relation of sum of the discounted elements of money stream from operating activity to the absolute value of the discounted sum of elements of money stream from investment activity. The index of profitableness of the discounted investments is equal to attitude of NPV megascopic on unit toward the accumulated discounted volume of investments.

A formula for determination of index of profitableness of the discounted investments looks like following:

Than the index of profitableness of the discounted investments is higher, so much the better project. If index of profitableness of the discounted investments is equal 1.0, a project barely provides the receipt of minimum normative income. At index of profitableness of the discounted investments less than a 1.0 project does not provide the receipt of minimum normative income. Index of profitableness of the discounted investments, equal 1.0, expresses a zeroing net present value.

Internal rate of return (IRR)

In most widespread case of investment projects beginning from (investment) expenses and clean monies receipts mattering positive, the internal rate of return names a positive number Е_В, if:

- at the norm of discount of Е = Е_В the net present value of project applies in 0,

- this number is unique.

In more general case the internal rate of return names a such positive number Е_В, that at the norm of discount of Е = Е_В the net present value of project applies in 0, at all large values of Е negative, at all less values of Е positive. If even one of these terms is not executed, it is considered that internal rate of return does not exist.

If to get back to the equalization described higher, internal rate of return this value of norm of discount (Е) in these equalizations, at which a net present value will be equal to the zero:

For estimation of efficiency of investment project of value of IRR it is necessary to compare with the norm of discount Е. Инвестиционные projects, at which IRR > Е, matter positive NPV and effective. Projects, at which < Е, have negative NPV and uneffective.

Term of return on investments taking into account discounting

The term of return on investments taking into account discounting names duration of period from an initial moment to the moment of recoupment taking into account discounting. The moment of recoupment taking into account discounting names that most early moment of time in a calculation period after which the net present value of NPV(K) becomes in future remains unnegative.

Maximal money outflow taking into account discounting

The maximal money outflow taking into account discounting is the maximal value of absolute value of the negative accumulated discounted balance from investment and operating activity. Size of vaximal money outflow taking into account discounting shows the minimum discounted volume of the external (in relation to a project) financing of project, necessary for providing of his financial realized.

ACCOUNT OF IMPORTANT FACTORS AT ESTIMATION OF EFFICIENCY OF INVESTMENT PROJECTS

Account of inflation

Inflation in many cases substantially influences on efficiency of investment projects. This influencing is especially noticeable for projects with the protracted investment cycle, for the projects realized due to the considerable stake of debt funds, for multicurrencies projects.

The account of inflation is carried out with the use:

• general index of internal rouble information;
• prognoses of rate of exchange;
• prognoses of external inflation;
• prognoses of change in time of prices on products and resources;
• prognoses of rates of taxes, duties, rates of refunding of central bank and other financial norms of government control.

For description of influencing of inflation on efficiency of investment project the following indexes are used:

• general index of inflation for period from an initial point (points 0, as which it is possible to adopt the moment of development of project document, began or end of zeroing step, moment of adduction, began zeroing step or other moment) to the end of m step of calculation(base general index of inflation). He reflects the relation of middle standard of prices at the end of m step to the middle standard of prices in the initial moment of time. If as an initial point the end of zeroing step is accepted;
• general index of inflation for a m step reflecting the relation of middle standard of prices at the end of step m-1(chain general index of inflation). If as an initial point, beginning of zeroing step is accepted;
• general inflation rate (level, norm) for this step expressed usually in percents in a year (or month);
• middle base index of inflation on m step, reflecting the relation of middle standard of prices in the middle of m step to the middle standard of prices in an initial moment.

Account of vagueness and risk

In the calculations of efficiency of investment projects it is recommended to take into account a vagueness, I.e. incompleteness and inaccuracy of information about the terms of realization of project, and risk, I.e. origin of such terms which will result in the negative consequences for all or separate participants of project.

A project is considered steady, if at all scenarios he appears effective and financially-realized, and the possible unfavorable consequences are removed by the measures foreseen by the organizationally-economic mechanism of project.

For estimation of stability and efficiency of project in the conditions of vagueness it is recommended to use the following methods (every next method is more exact, though and more labour intensive, and application of each of them does unnecessary application of previous):

• combined larger into units estimation of stability;
• calculation of levels of break-even;
• variations of parameters;
• estimations of the expected effect of project taking into account quantitative descriptions of vagueness.

Account of factor of time

To the different aspects of influencing of factor of time, which must be taken into account at estimation of efficiency of investment projects, it is possible to take:

• dynamic quality of tecnical and economic indexes of enterprise (volume and structure of the produced products, norms of expense of raw material and materials, quantity of personnel, duration of production cycle norm of supplies of materials and prepared products, etc.);
• physical wear of basic facilities;
• prices change on products and consumable resources;
• prices change on buildings and installation works;
• change of economic norms (rates of taxes, duties, excises, etc.);
• change of interest rates;
• change of value of monies in time;
• change of norm of discount;
• breaks in time between production and realization of products, and also between payment and consumption of resources.

CONCLUSIONS

It is possible to see from obtained information, that complication, bring complex character over of investment projects to that taking into account all factors terms and descriptions of realization of project is impossible, the more so in a strictly formality kind. Along with contradiction of interests of participants of project it results in the necessity of the use during the economic evaluation of many criteria.

Thus, estimation of efficiency of any investment project, as a rule, implies not only quantitative but also high-quality criteria. Nevertheless, quantitative criteria are exceptionally important, as they are added to more clear interpretation, have the high degree of definiteness, are comparable in space and time.

General logic of economic evaluation of investments with the use of formality criteria is obvious enough – it is necessary to compare the size of the required investments to the forecast profits, and then to draw conclusion about acceptability of this investment project on the basis of the got results.

All, higher stated, is theoretical part of my work. The abode and satisfied work, with the written software product, will be realized by the end of this year.

Literature

1. Непомнящий Е.Г. Экономическая оценка инвестиций Учебное пособие. – Таганрог: Изд-во ТРТУ, 2005.

2. Дубинин Е. Анализ рисков инвестиционного проекта - статья взята с http://www.cfin.ru/

3. Рябых Д. Анализ инвестиционных проектов: в поисках идеального баланса - статья взята с http://www.klerk.ru/

4. Воронов К. Основы теории инвестиционного анализа - статья взята с http://www.aup.ru/

5. Инвестиции: Учебник / Под ред. В.В. Ковалева, В.В. Иванова, В.А. Лялина. – М: ООО «ТК Велби», 2003.

6. Липсиц И.В., Коссов В.В. Инвестиционный проект. – М.: БЕК, 1996.

7. Ковалев В.В Методы оценки инвестиционных проектов. – М.: Финансы и статистика, 2003.

8. Абрамов А.Е. Основы анализа финансовой, хозяйственной и инвестиционной деятельности предприятия. – М.: АКДИ «Экономика и жизнь», 1994.