For every reputable corporation, the main goal will always be to increase income through the investment of capital. Before starting to invest funds, management needs to determine the financial base of the company, the volume of possible investments, as well as the economic feasibility of participation in the proposed project. Therefore, it is very important to correctly use the collected information and further analyze investment projects to monitor and control the investment management process. This is the only way to achieve a high return on investment.
What is investment analysis
To make it easier to understand the intricacies of investing, you must first know the basic definition.
So, the comprehensive application of methods and techniques for assessing the economic feasibility of financing any projects, which investors rely on to make the right decision, is called investment analysis.
The process of such analysis always occurs dynamically and has two directions: substantive and temporal. The subject carries out analysis in order to determine basic investment decisions taking into account various factors.
These factors include:
- economic environment;
- goals and objectives set for investment;
- environmental safety;
- the significance and impact of the project on the social infrastructure of the region;
- determining the presence of financial risks;
- plans of investors on issues of financing, organization, marketing, etc.
The above aspects are worked out during the preparation of the project itself, and then, during the analysis, they are taken into account for making decisions and introducing corrective measures.
The temporary direction considers work that begins from the moment the idea arises and lasts throughout the life of the entire project, because it ensures its continuous development so that upon its completion investors receive a profit not lower than the expected level.
Functions
The main functions of investment analysis are:
- Creation of an authorized organization that will collect information and coordinate the process of implementing the goals of the investment project.
- To make a choice of the most suitable investment systems, the organization makes a decision based on preliminary analyzes taking into account alternative options and determines the order of the necessary activities.
- Timely identification and resolution of technology, financing, environmental or social problems that may arise during project implementation.
Tasks
Analysis of investment activity is aimed at finding solutions to the following problems:
- comprehensive assessment of the necessary conditions for investment;
- justification of prices for necessary activities and selection of a source of financing;
- precise determination of external and internal objective and subjective aspects that may lead to negative changes in investment results;
- comparison of losses from possible risks acceptable for investors with expected income;
- mandatory final monitoring of the project to introduce measures that improve the results of further investment.
Goals
Investment analysis of an enterprise sets the goal of accurately finding the possible result from the implementation of investment projects with the obligatory compilation of a list of all expenses that went into the formation of the project. After all, they play a key role in value formation.
Investment analysis methods
Now we need to consider in detail how exactly investors increase their capital.
Analysis of investment attractiveness is necessary for corporate managers to provide reliable information about the objects in which they plan to invest. Since there are a huge number of ways to conduct these events, it is better to consider in detail all the options according to their popularity and frequency of use.
If a corporation wants to purchase shares of other companies, then the following investment analysis methods will be used:
- Cost analysis using replacement takes into account the capital construction of a facility from scratch at current prices, but discounts are applied (most often 10-20%) from the cost of a new one to roughly calculate the cost of a currently operating enterprise.
- Relative analysis of an acquisition transaction, where one corporation buys another company, taking into account the book value of assets and stock prices.
- Comparative analysis of companies is the process of comparing the economic performance of one company with similar enterprises.
- Discount cash flow analysis is a procedure for evaluating a company by determining the estimated income from the acquisition of securities that confirm ownership of part of the company.
Retrospective analysis
This type of analysis can be used when past price fluctuation data has already been analyzed to determine the causes of fluctuations and their consequences for the performance of the investment project.
Valuation of shareholdings
Sometimes a situation arises when the shares of a company that is going to be acquired by a corporation are not traded on the stock exchange. Then they perform a financial investment analysis, or rather, use information from the accounting reports of the company of interest and, if possible, the accounting reports of companies in the same industry, but so that their shares are quoted on the stock market. The stock quotes of the above-mentioned companies must be taken into account.
Factor analysis
To cope with assigned tasks and achieve the right solution, experts use mathematical algorithms in combination with logical thinking and intuition. To make it convenient to conduct an investment analysis of an enterprise and to more easily assess risks to the value of an investment project, managers draw up a questionnaire that has a universal form.
After carefully processing the information received and solving numerous optimization problems, experts directly identify and evaluate specific types of financial risks of the project, and also draw up the necessary list of measures to minimize possible losses and adjust the structure of the investment portfolio.
It was in the process of research in the field of forecasting that most methods of expert assessments were developed. The most famous among them are the Delphi method and the method of working with scoring matrices, which are collapsed through the use of linear weight coefficients in each individual option. However, there is always one left main problem, which is very difficult to cope with: each of the investment analysis experts speaks based on their personal experience, so everything decisions made quite subjective.
Similar shortcomings occur in the method of paired comparisons. To begin with, criteria are formulated, and then they are given a certain weight of influence on the investment project, so that in the future it is possible to streamline all the important factors of financial risks.
The main purpose of the existence of any commercial structure is to generate income. One way to achieve this goal is through investing. You should invest only after an investment analysis has been carried out. It allows you to determine the feasibility of the chosen investment method.
What is investment analysis
Investment analysis (IA) is a set of activities necessary to formulate an effective business plan and establish the degree of feasibility of investment. The analysis allows you to justify the chosen investment method.
When should the analysis be carried out?
Investment analysis can be divided into two categories:
- Subject analysis. Research is carried out before the transaction begins. It is fundamental for deciding whether to invest. The process involves analyzing all aspects that may affect the course of investment. Subject analysis involves the formation of investment goals and objectives. The degree of risk is calculated. The social significance of the project and the strategy for its management are determined.
- Temporal analysis. It is carried out throughout the entire investment project.
IMPORTANT! Investment analysis is a non-short-term measure, but a dynamic activity. Carrying it out during the project implementation allows you to adjust tasks and goals and increase efficiency.
Investment analysis functions
Let's consider the functions of investment analysis:
- Formation of a structure for collecting information necessary for effective investment.
- Establishing risks that are possible at various stages of an investment project.
- Finding alternative ways to invest.
- Creating a basis for decision making.
- Establishing the priority of investment activities.
- Creating a basis for making decisions regarding fundraising.
IA is a multifunctional tool.
Objectives of investment analysis
Let's consider the tasks of IA:
- Selection of funding sources that will provide the expected result.
- Selecting appropriate investment decisions that will enhance the company's competitiveness.
- Analysis of the degree of risk for investors.
- Determining the degree of profitability of the project.
- Improving the quality of investments.
Investment analysis allows you to create a base for all stages of an investment project.
IMPORTANT! The main purpose of the analysis is to determine the feasibility and effectiveness of the project. The result of its implementation and the benefits of the project are calculated. If the benefits from the investment are insufficient, the project will not be approved.
Investment analysis methods
For various types Investments are designed using various methods of analysis.
Analysis of real investments
Real investments (RI) differ from financial ones. The differences are determined by the methods used. Let's look at them:
- Income from real investments can only be expected in the long term (a year or more).
- The volume of RI is quite large.
- RIs usually have a direct connection to the company's long-term goals.
All differences considered must be taken into account when conducting the analysis. The research is carried out in two directions:
- Study of the economic efficiency of deposits.
- Determination of the degree of risks.
The study of the economic efficiency of deposits is carried out in the following ways:
- Accounting estimate. Based on current estimate of project values. This does not take into account such a factor as time. The accounting assessment is characterized by simplicity and clarity. However, the method in question is considered auxiliary.
- Dynamic method. The assessment is carried out taking into account such factors as time. The method is considered more accurate.
Various mathematical methods are used to assess the degree of risk.
Analysis of financial investments
FI analysis can be performed by a variety of methods. Let's consider the main ones:
- Fundamental. The main goal of this method is to assess the attractiveness of securities and the dynamics of changes in their value. In the process, the global market and individual industries are analyzed. This method allows you to explore fundamental issues.
- Technical. Within its framework, a forecast regarding the value of securities is formed. The forecast is based on past price movements. Technical analysis allows you to determine the optimal moment to buy and sell securities.
- Briefcase. The process involves analyzing the investment portfolio. The main goal of the method is to study the relationship between profitability and risk values and select the optimal portfolio.
The methods can be used individually or in combination.
Analysis procedure
The following stages of investment analysis can be distinguished:
- Formation of an information basis. Information is collected on the basis of which the analysis will be performed.
- Conducting preliminary research. In particular, a preliminary analysis of external factors and conditions of the investment environment is carried out.
- Assessment of external factors. At this stage, the market itself and external parameters that may influence investment attractiveness are examined.
- Study of the volume of available funds in the company. This is necessary in order to determine the amount of money that will be used for investment. This stage also explores the potential of the organization.
- Economic Stability Study.
- Creating a conclusion about an investment project based on a set of factors.
- Conducting comparative analysis.
The stages of analysis may vary depending on the purpose of the study.
Analysis example
The company uses equipment to produce products. This year, equipment appeared with the same functions, but it is more productive, mobile and fast. The acquisition of equipment will increase the volume of production and reduce manufacturing costs. The initial cost of the equipment was 32 thousand dollars. It was subject to depreciation over 10 years. The current cost of the equipment is $15 thousand. New equipment costs $55,500. Its service life is 8 years. After this time has expired, the equipment will be turned into scrap. The cost of this scrap will be $1,500.
The productivity of the current equipment is 200 thousand units of finished products per year. When using new equipment, the considered value will increase by 25%. The organization's management is confident that this entire volume of products will be sold. Current costs per unit of product:
- 12 cents – payment of salaries.
- 50 cents – raw material costs.
- 24 cents is overhead.
When operating new equipment, expenses will be as follows:
- 8 cents – payment of salaries.
- 47 cents – raw material costs.
- 16 cents - overhead.
Costs for paying salaries decreased due to the fact that the operation of new equipment made it possible to fire one operator. The process has become more automated. Costs for raw materials are reduced due to the fact that losses are reduced. Based on these values, a table is compiled. In this case, the initial investment is $35,625 (minus income from the sale of old equipment and tax deductions).
The methodology for analyzing the effectiveness of financial investments is based on determining the mandatory parameters characterizing financial instruments or the conditions under which the acquisition of securities is planned. Mandatory parameters for analyzing the effectiveness of financial investments include:
- a) the amount of investment, or the cost of the package of securities that is planned to be purchased;
- b) profitability of financial instruments, including assessment of the efficiency of use of capital (for joint-stock companies);
- c) the level of risk of investing capital in a certain financial instrument;
- d) method of analyzing the effectiveness of investment activities.
Traditional analysis of the effectiveness of financial instruments is a complex and time-consuming procedure, mainly of a long-term nature, based on the study of the main economic factors influencing the market valuation of a financial instrument. Analysis of the effectiveness of financial investments using traditional methods and techniques of economic analysis includes three main areas: market analysis, macroeconomic analysis and microeconomic analysis (Fig. 12.3).
Object analysis of economic conditions is the study of the totality of factors and conditions of production, both external and internal, their relationship and influence on the relationship between demand, supply and prices. Consequently, it can be argued that market analysis is carried out on the basis of research results at the macro and micro levels, which, in turn, are independent areas of comprehensive economic analysis.
Macroeconomic analysis interesting for investors in the light of long-term and medium-term prospects. It includes two areas: analysis of macroeconomic factors and industrial
Rice. 12.3. Main directions of analysis of financial investments
nal analysis. The main indicators of general economic analysis are: the volume of gross domestic product, the level of inflation, unemployment, exchange rate, indicators of external and internal trade turnover, the amount of government spending and borrowing in the financial market, reflecting the balance of payments and the general economic climate in the country.
In some countries, various complex (statistical) indicators are used to conduct research (for example, the business activity index (1P) in Germany; the index of leading market indicators in the USA, etc.). The most well-known comprehensive assessment of the economic development of countries in the world is the journal’s methodology, on the basis of which twice a year a rating assessment of investment risk and reliability of countries is carried out from the perspective of political and economic risk and the state of the monetary system.
The second direction of macroeconomic analysis is industrial analysis, which involves studying regions and classifying industries depending on the level of their business activity. The most objective assessment of the main economic indicators of the region can be obtained using the methodology of the Expert-RA rating agency, developed by Russian experts taking into account foreign and domestic experience existing in this field of research. In accordance with this methodology, the economic condition of the region is assessed using a complex system consisting of three important subsystems:
- a) investment potential, i.e. the totality of production factors existing in the regions and the scope of capital application;
- b) investment risk, or a set of variables, a fact about () about investment;
- c) legislative conditions, i.e. a legal system that ensures the stability of the activities of real and potential investors.
The third stage of analysis is microeconomic analysis, which involves studying the activities of an enterprise, assessing its financial condition and position on the securities market. In the process of microeconomic analysis, an assessment is made of the financial stability, profitability, and solvency of the enterprise based on the results of its financial and economic activities (Table 12.8). The most common method of summarizing economic information is constructing a rating assessment, the results of which are used as recommendations for actual and potential owners of securities of the enterprises under study.
Table 12.8.
An important area of microeconomic analysis is the study of the market activity of an enterprise. The results obtained are intended for financial managers of joint-stock companies registered on stock exchanges and listing their securities there, and for any participant in the stock market acting as an actual or potential owner of securities.
The main indicators of the analysis of market activity are: earnings per share, share value, dividend yield and dividend "yield" of the share, the ratio of revenue and market value, the coefficient of coverage of shares by the enterprise’s own funds. Calculation method and brief description main indicators are presented in table. 12.9.
Table 12.9.
On final stage analysis of financial instruments, information about the enterprise, its industry and regional affiliation is analyzed in detail and systematized in order to determine the investment value of securities and assess the feasibility of their acquisition. In the process of research, the profitability of not only a specific security, but also the capital of a joint-stock company is studied, making it possible to determine the level of efficiency of its use and impact on the welfare of shareholders. When assessing the efficiency of using share capital from the point of view of the security of shares with the enterprise's own capital, it is necessary to take into account the influence of three main factors: changes in share capital, the amount of own working capital, and the presence of retained earnings of the joint-stock company. In this case, the relative wealth of shareholders at the current time is calculated using the formula
Where DaK - the relative value of shareholders’ wealth at the current time;
DCK - change in the value of own working capital for the period; Sw - the amount of retained earnings predicted for the payment of dividends; 5ak - share capital.
If we conditionally assume that the joint stock company "Enterprise 1" does not provide its shares for public sale, which is currently happening on the regional equity securities market, the efficiency of using share capital will look as follows (Table 12.10).
Table 12.10. Indicators of the efficiency of use of share capital of JSC "Enterprise 1"
In accordance with the data presented in table. 12.10, we can conclude that the dynamics of the efficiency indicator for the use of share capital is positive, but is characterized by a downward trend as a result of a reduction in the amount of own working capital.
If an enterprise acts on the securities market as an open joint-stock company and its securities are characterized by a certain exchange rate, then the given formula (12.12) for assessing the efficiency of using share capital will look like this:
where /Sb is the ratio of the exchange rate of equity securities to the internal value, which in turn is the quotient of the division of the equity and share capital of the enterprise; 5dv/5ak - the amount of income per unit of share capital, which corresponds to the amount of dividends paid;
K(> Ark/^ak is a value characterizing potential income from the sale of shares at the exchange rate.
Let's calculate the efficiency of using the share capital of OJSC "Enterprise 1" and present the calculation results in table. 12.11.
Table 12.11. Indicators of the efficiency of use of share capital taking into account the market value of shares of OJSC "Enterprise 1"
Based on the data in table. 12.11 we can conclude that the share capital of a joint stock company in the securities market is not used effectively enough. The results obtained indicate that industrial enterprises do not fully realize their capabilities in the financial investment market in accordance with the needs of economic growth of the region.
Methodology technical analysis the effectiveness of financial investments is used mainly in the short term and allows you to interpret the research results obtained using the techniques and methods of traditional, or classical, security analysis. It is carried out on the basis of:
- a) investment strategies (inertial strategy; moving average and market line breaking strategy);
- b) statistical methods for processing economic information (linear regression, correlation analysis, trend-filtration forecasting).
Inertial investors (momentum investors) seek to purchase securities that have recently risen significantly in price, believing that they will continue to rise due to an upward shift in their demand curves. Investors who are contrarian (contrarians) strategies act completely opposite to what most other investors do in the market: they buy securities that other investors avoid purchasing. Moving Average Strategy (Fixed-Length Moving Average Strategy) records each day a security is purchased or sold. In this case, buy or sell signals will occur only at the moment when the ratio of indicators changes in the opposite direction. The market line breaking strategy is similar to the moving average strategy, only the object of study is the change in the maximum-minimum prices over a certain period of time.
Using statistical methods for processing economic information, the relationship between the exchange rate of an enterprise's securities and the general state of the market, recorded by various stock indices, is technically analyzed. This relationship is called the market model (market model) and is reflected in the form of a formula
Where Rj- yield of chain securities (/) for the reporting period; a.jy- mixing factor; fijü - slope factor; Ejy- random error.
The slope in a market model, or ß-ratio, measures the sensitivity of a security's return to the return of a market index. Accordingly, a stock with an ß-ratio greater than 1 has greater volatility than the market index and is called an “aggressive” security (aggressive stocks); conversely, a stock with a ß-ratio less than 1 is subject to less volatility than the market index and is called "defensive"
security (defensive stocks). Random error (random error term) shows that the market model does not very accurately explain the return of securities and for a given return on the market index, the actual return of the security usually lies outside the straight line specified by the market model equation (12.14).
However, the 3-coefficient and diversified risk indicators do not give a final answer to the question of the riskiness of financial investments, since the research results are to a certain extent conditional and operate with approximate characteristics and assumptions.
Thus, in world practice, there are two methodological approaches to assessing the effectiveness of financial investments: traditional (fundamental) and technical, which, in essence, represent a kind of diagnostic system for assessing the state of the stock market as a whole and specific securities. Traditional analysis of the risk and return of financial instruments is long-term in nature and forms the basis of securities analysis in an efficient market. Technical analysis makes it possible to describe the short-term state of the securities market, which allows both actual and potential investors to obtain more specific information about financial instruments. However, obtaining reliable information about securities largely depends on the integrated use of various methodological approaches to develop both short-term and long-term forecasts.
Investment analysis is one of the financial management methods for making decisions about the effectiveness of using investment funds.
The essence of investment analysis is to study the effectiveness of a particular investment project.
A study of the scientific literature on investment issues led to the conclusion that currently there are a number of methods for assessing investment projects, many of which are based on a comparison of the planned volume of investments and the expected future cash flows from them (or investments and actual income received, if we are talking about the analysis of an already implemented investment project).
Methods for assessing effectiveness can be divided into groups based on various classification criteria. Based on the type of general indicator that acts as a criterion for economic efficiency, one can distinguish absolute methods in which the efficiency indicator is calculated as the difference between the cost estimate of the results and the costs required to achieve a similar result; relative methods in which the efficiency indicator is the ratio of the result to the corresponding costs; time methods that estimate the payback period of investment costs.
According to the method of comparing monetary costs and results at different times, one can distinguish static and dynamic methods. Static methods are methods by which cash flows arising in different times, are assessed as equivalent. This group of methods includes, for example, the payback period (PP), investment efficiency ratio (Accounting Rate of Return, ARR). Dynamic methods are methods in which cash flows caused by the implementation of an investment project are brought to a comparable form using discounting, ensuring the comparability of projects at different times. The group of dynamic methods includes methods such as net present value (Net Present Value, NPV), profitability index (PI), internal norm profitability (Internal Rate of Return, MIRR), discounted payback period (Discounted Payback Period, DPP) Nepomnyashchiy E.G. Investment design: Tutorial. Taganrog: TRTU Publishing House, 2003, - p. 62. .
The list of methods used to evaluate investment projects is presented in Table 6.
Table 6 - Methods for assessing the effectiveness of investment projects
|
Classification feature |
Characteristics of methods |
|
|
1 Type of general indicator that enters into the criterion of economic efficiency |
Absolute Methods |
The efficiency indicator is defined as the difference between the valuation of results and the costs required to achieve them |
|
Relative methods |
The efficiency indicator is defined as the ratio of results to costs |
|
|
Temporary Methods |
Estimate the payback period of investment costs |
|
|
2 Method of comparing monetary costs and results |
Statistical methods |
Cash flows arising at different times are assessed as equal |
|
Dynamic Methods |
Cash flows caused by the implementation of the investment project are reduced to a comparable form using the discounting procedure |
Static methods do not include discounting. These methods have significant drawbacks due to the fact that the time aspect of the value of money and factors associated with inflation and risk are not fully taken into account. At the same time, the process of conducting a comparative analysis of design and actual data over the years of use of the investment project becomes more complicated. Therefore, static methods for assessing the effectiveness of investment projects can only be used for short-term investment projects, in cases where costs and results are evenly distributed over the entire duration of the project. However, they have an important advantage related to the simplicity and speed of calculation, and accessibility for everyone to understand.
Static methods for assessing investments can be divided into two groups:
absolute efficiency methods and comparative efficiency methods. Among the absolute efficiency methods, there is a method associated with calculating the payback period of a project, and a method based on determining the rate of return on capital (investment efficiency method). Comparative efficiency methods include methods such as: the method of accumulated cash flow balance (cumulative effect) for the billing period.
The theory of absolute investment efficiency is based on the fact that a project is subject to implementation that provides the investor with a given (normative) level of efficiency. Thus, if the expected level of return on capital or the payback period of the project will satisfy the investor (i.e. will not be lower than normative value), such a project will be implemented.
The theory of comparative investment efficiency is based on comparing, comparing the indicators of several (at least two) projects and choosing for implementation among them the one that provides either the minimum amount of reduced costs, or the maximum profit, or the maximum accumulated effect for the billing period.
Dynamic methods, unlike static ones (and this is their advantage, especially if we are talking about medium- and long-term projects), take into account the change in the value of money over time. The time value of financial resources has two aspects.
The first aspect is related to the purchasing power of money. Cash at a given moment and after a certain period of time with an equal nominal value have completely different purchasing power. At current state economy and the level of inflation, funds not invested in investment activities or deposited in a bank depreciate very quickly.
The second aspect is due to the circulation of funds as capital and the receipt of income from this turnover. To estimate the time value of money, there is the concept of discounting. Discounting is a method that is used in evaluating investment projects and consists of expressing future cash flows associated with the implementation of the project through their value at the current time. Thus, the methods of this group overcome the main disadvantages of static methods, but they have their own. Among the main disadvantages are the difficulty and ambiguity of forecasting cash flow, the difficulty in choosing a discount rate, and the need to take into account the assumption of a perfect capital market.
The use of these methods can, to a fairly high degree, show a correct picture of the effectiveness of investments. However, not one of the listed methods can be used on its own, without taking into account the results based on other criteria, i.e., these methods should only be used in combination.
Each of the methods has a very important advantage: they have clear mathematical formulas, results and criteria. The methods described above are necessary when making decisions in an organization regarding projects that are identical in all qualitative parameters. However, this is not always enough to make a decision to invest in an existing enterprise. Since one of the tasks when assessing the effectiveness of investment projects is to analyze how well a particular project corresponds to the goals and strategy of the enterprise, it is necessary to use a method that would allow solving this problem.
As a rule, in the process of investment analysis the following tasks are solved:
- · selection of the optimal strategy among alternative ones;
- · identifying the economic feasibility of the investment, i.e. identifying the absolute excess of results over invested resources;
- · assessment of the effectiveness of investment activities.
In the vast majority of cases, the purpose of analyzing financial investments is to substantiate the investment decision that the investor must make. The classification of types of investments and investment decisions is essential in practice due to the fact that different investments may have different objectives and economic consequences for investors. However, each type of investment, as a rule, has its own separate market and must be analyzed using appropriate methods and approaches.
Analysis and commercial assessment of investment projects includes:
- · calculation according to methods recommended by UNIDO and other international organizations.
- · comparison of alternative options for implementing investment projects.
- · optimization of project financing schemes and analysis of other investment conditions.
- · analysis and evaluation for external users of information on English Baikalova N.A. Methodology for analyzing contributions to the authorized capital based on data financial statements// Current problems of finance and accounting in consumer cooperation organizations, other areas and industries. Finance - accounting - audit - analysis - IFRS: Proceedings of the international scientific and practical conference. - Novosibirsk: SibUPK, 2007, p. 32..
Comparative characteristics of methods for analyzing financial investments, using the following criteria: the presence of a well-founded system of quantitative and qualitative indicators; sufficiency of accounting information; possibility of control; presence of private characteristics; the presence of a general indicator is presented in Table 20.1.
The formation of a methodology for analyzing new objects, such as contributions to the authorized capital of other organizations, should be based on a system that includes general and specific principles. The latter include:
- · formation of targeted information support based on data accounting;
- · taking into account the essence and characteristics of the types of financial investments of organizations,
- · analysis of the solvency of the investor and the investment object,
- · step-by-step approach to investment analysis and others (Table 34.1).
In essence, solving the investment problem comes down to comparison, but it is done not on the basis of comparing the absolute assessment of the project with the standard, but by comparing project options that have passed selection according to the standard with each other and choosing from the alternatives under consideration best solution. This assessment is called a comparative assessment of project profitability.
To determine the effectiveness of design solutions, a system of indicators has been developed, with the help of which an economic assessment of any business projects is carried out. However, the use of all evaluation indicators in each project is practically not required, since all projects differ significantly from each other. For each project, it is necessary to apply exactly those indicators that will take into account their individual characteristics and solve the problem of assessing their effectiveness.
Very often in business practice the problem of choice arises best option investing free funds. This usually happens when the investor has sufficient financial resources and has ample opportunities to use them. At the same time, when assessing the profitability of a project, the following sequence of actions of the entrepreneur is clearly visible:
- * selection of all alternative investment options that can be implemented by an entrepreneur;
- * determination of absolute estimates of the profitability of each investment option;
- * selection from the entire set of options under consideration those that are of interest (economic, social, environmental, political, etc.);
- * rejecting other options and excluding them from further selection;
- * conducting an absolute-comparative assessment of one selected option: if such an assessment turns out to be positive, then this option is accepted for implementation, otherwise it is rejected and the entrepreneur is looking for new opportunities for profitable investment of his capital;
- * if after the absolute assessment several remain various options, then each of them is subjected to an absolutely comparative assessment according to a system of different criteria;
- * the entrepreneur sets the most priority criterion for him and conducts a comparative assessment of the profitability of alternative projects according to the chosen criterion, and the option with which he is more satisfied is accepted by him for his business.
To determine the effectiveness of design decisions, a system of indicators has been developed, with the help of which an economic assessment of any business projects is carried out, and the investment attractiveness of organizations, namely:
- 1. Net present value (NPV); other names: net present value, net present value. Net Present Value (NPV).
- 2. Profitability index (ID); other names: profitability index, Profitabily Index (PI).
- 3. Internal rate of return (IRR); other names: internal rate of return, return on investment, Internal Rate of Return (IRR).
- 4. Discounted payback period (PBP) months).
In order for a project to be considered effective, one of the following conditions must be met:
- 1. NPV >0.
- 2. IRR > E, provided that the IRR of this project exists.
- 3. ID (PI) >1.0.
- 4. Payback period taking into account discounting T ok
Moreover, if condition 2 is met, the remaining conditions will also be met, but if any of conditions 1, 3, 4 are met, then other of these conditions will be met (although the NPV of the project may not exist).
