Abstract

Contents

Introduction

Ability to stay on the market of goods depends on the ability of businesses to accept new techniques and technology to ensure the most efficient use of financial, human and time resources [1].

The main problem most companies are behind the technology. Therefore, to produce high quality and competitive products to be brought into production the new equipment. In today's world there are no restrictions in the choice, if needed there in our country, it can be bought abroad. But the problem lies elsewhere - in the absence of financial resources. Therefore, every company sooner or later faces the investment process.

Investments can be classified by a number of grounds:

  1. the investment payback period are distinguished:
    • short-term - if the payback period not exceeding one year;
    • long-term - if the payback period is more than one year;
  2. the nature of the participation of investors in the investment process are distinguished:
    • direct investment. Are making the direct participation of investors in selecting investment projects and investment of funds;
    • indirect investment. There are the investor participates in the selection of the investee indirectly, with the assistance of third parties;
  3. the ownership distinguish investment:
    • private;
    • state;
    • foreign;
    • joint;
  4. the regional feature of investments may be at home and abroad;
  5. the method of calculating distinguish gross and net investment:
    • gross investment - is the total amount invested in the period focused on new construction, purchase of capital goods and growth stocks;
    • net investment - the amount of gross investment, reduced the amount of depreciation in the period.

As a return on investment made the difference between revenues during the period of investment resources and expenditure of funds in the same period (production costs, taxes, etc.). This difference in the result is either a profit or loss the investor [6].

Evaluate and compare the degree of efficiency of investment decisions of technical and organizational measures in the construction and operation of various economic facilities, including energy facilities may be feasibility study.

1. Theme urgency

To make the correct analysis of the effectiveness namichuvanyh investments necessary to consider many factors and is the most important thing you must do a financial manager. The degree of compliance by adoption of the project as part of a trend is different. Often decisions must be made at a time when a number of alternative or mutually independent projects. In this case it is necessary to choose one or more projects based on some criteria. Obviously, these criteria may be few, and the probability that any one project will be best for all others on all criteria, usually much less than unity [3].

2. Goal and tasks of the research

Objective: to choose the best criteria for evaluating the effectiveness of investments for energy.

The main objectives of research:

  1. analyze the known criteria for evaluating the effectiveness of investments;
  2. identify the advantages and disadvantages of criteria;
  3. determine the optimal number of options for evaluating the effectiveness of investment in electricity networks.

Object of study: electrical network.

Subject of research: methods for evaluating the effectiveness of investments.

Methods: methods used in the work known as: net present effect, the index return on investment, internal rate of return, modified internal rate of return, discounted payback period of investment, payback period of investment, the coefficient of efficiency investments.

Scientific novelty: recommendations for electricity.

3. Review of research

The problem of selecting the best criterion for analyzing the efficiency of investments appears no longer only to energy, especially to economists. This topic is devoted many articles and books, which elaborates on advantages and disadvantages of all known methods of analysis.

In DonNTU problem investing in energy deals E. Amelnytska that in his article Analysis of methods for assessing socio-economic efficiency of the design decisions in electric networks considers basic methods for evaluating the socio-economic efficiency of design solutions with and without discounting in general and in the energy sector in particular. In the article the necessity of considering depreciation in current cost, provided recommendations for determining the value of life of the project period.

V. Khobta and A. Meshkov in his article The formation and increase the investment attractiveness of businesses explored the basic level of investment attractiveness of formation, regions, industries and enterprises as system processes. They suggested ways of raising the investment attractiveness of the business of farming.

Article F.Y. Vyesyelova Investment in power sector: problems and prospects devoted to important questions about the problems of investing in energy.

The paper S.S. Tarasenko Prediction of the effectiveness of the project taking into account factors which weaken the external negative influence examines methods of evaluating the effectiveness of investment projects. It was suggested modification of the classical method of evaluation of investment projects, which feature is the possibility of quantitative evaluation of the weakening of external negative influences.

4. Feasibility study

The feasibility study includes the question of defining the basic economic indicators and should give all the necessary information for decision-making on investment projects. The analysis must be translated into costs, profit and net profit. [1].

General logic analysis using formal criteria in principle quite obvious - it is necessary to compare the magnitude of required investments of predictable income. Since comparable figures refer to different points in time, the key issue here is their comparability [4].

Decision-making investment-related, like any other kind of management, based on the use of various formal and informal methods. The degree of combination is determined by various circumstances, including those of them as manager familiar with the existing apparatus, applicable in a particular case. In domestic and foreign practice known a number of formal methods, the calculations by which they may serve as a basis for decision making in investment policy. A universal method suitable for all occasions, no. Perhaps of still more an art than a science. However, with some estimates obtained formal methods, even if somewhat arbitrary, it is easier to make final decisions. The main focus of the previous analysis is the determination of possible economic efficiency of investments, ie return on capital investments provided by the project. Typically, the calculation takes into account the temporal aspect of value for money [5].

Animation. Algorithm of technical and economic comparison of variants and definitions of economic efficiency of investments on construction of networks. Size: 120 kb, 11 staf, delay time - 0,01 s, cycle - 10 reps

Figure 1 – Algorithm of technical and economic comparison of variants and definitions of economic efficiency of investments on construction of networks

In technical and economic comparison of options with static production tasks to fulfill the following conditions:

  1. one-time investment in projects;
  2. annual costs unchanged;
  3. all variants of construction of facilities must comply with regulatory requirements;
  4. technical and economic analysis of all options are subject to the same period of time;
  5. providing the same effect in the energy consumers in all considered options [1].

5. Analysis of efficiency of investments

Efficiency analysis namichuvanyh investment includes the following six steps:

  1. determination of value (cost) of the project;
  2. evaluation of expected cash flows from the project and the value of assets on a temporary date;
  3. evaluation of the expected flow of payments, taking into account the time factor, ie the construction of discounted stream of payments;
  4. risk assessment projected cash flows using information about the possible distribution of cash flows;
  5. valuation of capital required for the project based on the discounted price;
  6. determination of performance criteria and comparison of present value of expected cash flows from investments necessary or cost of the project [5].

Assessment of financial and economic parameters of any project investing in real assets is always a complicated task, due to a number of factors:

  • first, the investment costs can be made, or once, or repeatedly over a long period of time (sometimes up to several years);
  • second, a long process and the outcome of investment projects (in any case, by definition, it is more than one year);
  • thirdly, the implementation of long transactions leads to growth uncertain in assessing all aspects of investment and risk errors.

The presence of these factors led to the need for special methods of evaluating investment projects can take quite a reasonable solution with the lowest possible margin of error (although absolutely reliable solution in the evaluation of investment projects, of course, can not be) [7].

6. Methods for analyzing investments

Methods for analyzing investments are used to address one of the following tasks:

  1. determining the level of performance independent of the project for its acceptance or rejection;
  2. define the level of efficiency projects mutually exclusive of each other (comparative effectiveness) to assess the possibility of taking one of several alternatives.

The effectiveness of the project is characterized by a system of indicators, reflecting the cost and results concerning the interests of its members. You can mark the next performance of the project:

  1. commercial (financial) which takes into account the financial impact of the project for its direct participants;
  2. the budget that reflects the financial impact of the project for federal, regional or local budget;
  3. economic, which takes into account the costs of social activities and environmental protection.

Estimation of future costs and benefits in determining the effectiveness of the project is within the settlement period to be (horizon calculation) has been adopted taking into account:

  • duration of the establishment, operation and (if necessary) the elimination of the object;
  • the average regulatory life of the main process equipment;
  • achieving the specified characteristics of profit;
  • investors requirements.

The basis of feasibility study process management decisions are investment-related evaluation and comparison of projected investment and future cash flows. Whereas comparable indices of different points in time, the key here is the problem of comparability.

Comparability of multi cash flows of the project is provided by their discounting, ie reduction to nachalnoho (zero) phase of investment. This is done to bring the values of indicators to the calculation of the values of integrated performance indicators (appropriate) of the project excluded from the calculation of the total change of scale of prices, but keep (that is, in particular through inflation) change in the structure of prices and the impact of inflation on plan implementation project [8].

Criteria used in the analysis of investment activity can be divided into two groups depending on whether or not considered a temporary option:

  1. based on discounted estimates (dynamic);
  2. based on accounting estimates (static).

The first group includes criteria:Net Present Value, NPV, Profitability Index, PI, Internal Rate of Return, IRR, Modified Internal Rate of Return, MIRR, Discounted Payback Period, DPP.

The second group includes criteria: Payback Period, PP, Accounting Rate of Return, ARR [4].

The most important of static methods is the payback period , which shows the ratio of the project. The disadvantage of static methods is the lack of accounting factor of time.

Dynamic methods to take into account the time factor, reflecting the most current approaches to evaluating the effectiveness investitsiy and prevailing practice in large and medium-sized enterprises of developed countries. In economic practice prymannya these methods is also due to high inflation.

Dynamic methods are often called the discount because they are based on determining the current value (ie discounting) the cash flows associated with the implementation of the project.

It made the following assumptions:

  • cash flows at the end (beginning) of each period of the project are known;
  • set score, expressed as a percentage rate (normal dis-Comte), under which funds may be invested in this project. As this assessment are commonly used: the average or marginal cost of capital for the enterprise; interest rates on long-term loans; required rate of return on invested funds and others. Significant factors affecting the value of evaluation is inflation risk [3].

Methods of increasing the discount and apply where necessary to find one of the unknowns:

  • the level of interest (eg, use of capital);
  • annual payments;
  • number of periods (months, quarters or years);
  • the current level;
  • value of future levels.

In the process of using these methods should consider the following requirements:

  1. Variables used in calculating present and future levels (for example, the level of interest, the number of periods and annual payments) must be known;
  2. The level of interest constant [2].

Net Present Value NPV is the most important indicator of the project. It is based on a comparison of the value of investment costs (CF) and the total time-adjusted future cash flows generated by it during the forecast period [4].

Formula to calculate the net present effect is:


whereI0 – initial investment;

CFt – cash flow in year t, which are received through these investment;

k – desired rate of return (Profitability).

The method of analysis of investments based on the determination of net present value, which value the firm can gain from the sale of the project, based on two conditions:

  • any company seeking to maximize their value;
  • riznochasovi costs are unequal value [7].

If NPV < 0, in case the project value of decreases, ie the owners of bear damage. If NPV = 0, in case the value of the project will not change, ie welfare of its owners remain the same. If NPV > 0, in case the project value of the company, and hence the welfare of its owners will increase [4].

The wide spread method of assessing the acceptability of investment based on NPV due to the fact that it has sufficient strength for different combinations of initial conditions, allowing all cases to find an economically rational decision. However, it still gives an answer only the question of whether the analyzed variant promotes investment growth values of the company or investor wealth in general, but does not say anything about the relative extent of such growth. And this event is always important for any investor. To fill this gap using another indicator - the method of calculating return on investment [7].

Profitability index characterizes the level of income per unit cost, ie the efficiency of investments - the more the value of this index, the higher the efficiency of each monetary unit invested in this project [4].


Obviously, if the NPV is positive, then the PI will be greater than unity, and accordingly reverse. Thus, if the calculation gives a PI greater than one, then the investment is acceptable. Attention is drawn to the fact that PI, acting as an indicator of absolute acceptability of investment, while providing an opportunity analysis for the study of the project in two ways.

First, it can be to feel something like sustainability measures such a project. Second, PI provides investment analysts reliable tool for ranking different investments in terms of their attractiveness, and this aspect is very important to get us back to it again later [7].

Internal Rate of Return is calculated by finding the discount rate at which the present value of future cash flows equals the initial amount of investment [2].

IRR shows the expected profitability of the project, and therefore the maximum relative level of costs that may be associated with this project [4].

In the standard implementation of investment projects made the following assumptions:

  1. we must first make the cost of funds (to prevent the outflow of funds) and only then can rely on cash flow (flow of);
  2. cash receipts are cumulative in nature, and their sign changes only once (ie they may be initially negative, but then became positive, and remain so throughout the period under review the investment).

For such standard investment fair to say that the higher the discount rate, the less value NPV, as illustrated by Figure 1.


Dependence of NPV on the level of discount factor

Figure 2 - Dependence of NPV on the level of discount factor

As shown in Figure 2, IRR – is the value of discount factor k, where the curve changes NPV crosses the horizontal axis, i.e. NPV is equal to 0.

The more IRR exceeds the firm's co-barrier rate (normal rate of return), the greater the margin of the project and the less terrible mistakes in assessing the values of future cash flows [7].

MIRR – is the rate coefficient in the discount balances inflows and outflows of funds for the project. All cash flows of income are brought to a future (final) value at the weighted average cost of capital sum, the amount is reduced to present value at the rate of internal return, with this value of income is deducted the real value of money cost and estimated net present value of the project, which is compared with the present value of costs [3].

Discounted payback period of the project is a time period from the beginning of its funding until the difference between the amount of income and accumulated depreciation and cost of the project takes a positive value.

In other words, it is period (measured in months, quarters or years), from which the initial investment and other costs associated with the investment project covered by the summary results of its implementation.

Discounted payback period method is used to find the updated time period of the project subject to temporary cash flow estimates on it.

A major shortcoming of the method of discounted payback period is that it only considers the initial cash flows, that is those that fall within the payback period. All these cash flows into account are not accepted [8].

Method of determining the Payback Period is one of the simplest and widely used. Algorithm for calculating the hazard depends on the uniformity of distribution of projected income from investments. If income is distributed evenly by year, the payback period is calculated distribution of disposable costs by the amount of revenues caused by them. If income is distributed unevenly, the payback period is calculated by direct counting of the number of years in which investment will be repaid cumulative income.

Some experts in calculating the index term Payback Period (PP) is recommended to take into account the time aspect. In this case, taken into account cash flows, discounted at ratesWACC (weighted average cost of capital). Thus, determined when discounted cash flows of income draw level with discounted cash flow costs. If the discount payback period increases [4].

If the essence of this method to formulate more precisely, it involves the calculation of the period for which the cumulative sum (sum total growing) cash inflows equal to the amount of initial investment. Formula to calculate the payback period is:


where PP – payback period, years;

I0 – initial investment;

CFt - annual amount of receipts from sales of investmention project [7].

Method of Accounting Rate of Return (ARR)has two characteristics: first, does not involve discounting indicators of income, and secondly, the income is characterized by net profit [8].

Accounting Rate of Return (ARR) is often compared to the profitability of advanced capital ratio, calculated distribution of the total net profit trade organization for the total amount of money advanced to its affairs [3].

If ARR less rate of return RK, the project will bring less income than a company carrying out normal activities. In the case when the return on the investment project is expected higher profitability advanced capital (ARR > RK), the company make an investment profitable [8].

Conclusion

The use of any, even the most sophisticated, methods do not provide the complete predictability of outcome, the main aim is copresented by the affixing of investment projects based on a unified approach with possible objective and indicators and preparation of relatively more efficient and relatively less risky portfolio.

This should apply especially dynamic methods based primarily on discounting formed in the project cash flows. The use of discounting can display the basic principle of tomorrow's money today's cheaper and thus consider the possibility of alternative investments at the rate of discount. The general scheme of dynamic methods of evaluation basically the same and based on the prediction of positive and negative cash flows (roughly speaking, costs and revenues associated with the implementation of the project) for a planned period and comparing the resulting balance of cash flows, discounted at the appropriate rate of investment costs. And measures of investment risk and application of methods of calculation of uncertainty in the financial calculations that reduce the impact of incorrect predictions for the outcome and thus increase the likelihood of correct solutions can significantly improve the validity and correctness of the analysis [3].

The need to use all methods of estimation due to the fact that the estimates by different methods may be controversial. Comparing the estimates of investment by different methods analyst draws conclusions about the pleasure of a project [8].

References

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At a writing of the given author's abstract master’s work is not completed. The final version of work can be received at the author or the supervisor of studies after December, 2012.