Method of options in assessing the effectiveness of investment projects
Methods of investment assessment……………………………………………… Departure from a centrally planned economy, the introduction of market relations, a change in property relations were accompanied by a decrease in living standards, aggravation of problems in social and other areas.
Significant influence of negative factors has been affected by domestic industry. The reasons for this can be found in poor management, method of options in assessing the effectiveness of investment projects of financial resources, obsolescence of technology, and a high degree of depreciation of fixed assets.
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One of the most important elements of the implementation of process innovation projects is the use of formalized methods for evaluating investments to select the best option for implementing such a project.
Practice shows that at present in Russia the heads of industrial enterprises practically do not use formalized methods for evaluating investment projects for planning process innovation projects. Often, as a result of this approach, the basis for these projects is the option of mastering a new technology that is not optimized in terms of costs, which leads to the failure of the project.
Evaluation of investment effectiveness
It is known that risk assessment of an innovative project is a difficult task. A number of domestic economists have developed methods to assess the risks associated with investing in an innovative project. However, most of these methods are focused on risk assessment of product innovation projects. For process innovations, the application of these methods is fraught with some features, the underestimation of which can seriously complicate the evaluation of the project or lead to incorrect conclusions.
Problem of evaluating the efficiency of investment projects in the Russian economy
The criteria used in the analysis of investment activity can be divided into two groups depending on whether or not the time parameter is taken into account: 1. Using investment assessment methods, taking into account these characteristics, will increase the likelihood of successful implementation of innovative projects in industries, preserve the potential of Russian industry and lay the foundation for sustainable industrial growth and scientific and technological progress STP.
Thus, the analysis and evaluation of the features of the application of investment assessment methods, risk accounting methods for process innovation projects relevant for the Russian economy both in theoretical and in practical aspects, especially for those industries for which the modernization of production is a necessity to reduce costs and improve the situation of enterprises.
We also note that the importance of this issue is great not only for the present moment, but also for the strategic development of the Russian economy. The purpose and objectives of the study.
The aim of the work is to study and systematize the features that must be taken into account when applying investment assessment methods when planning process innovation projects, making recommendations on the application of investment project evaluation methods for planning process innovation projects. Investment Valuation Methods 1. Since the cash inflow is distributed over time, it is discounted using the coefficient r, determined by the analyst investor independently on the basis of the annual percentage of return that he wants or can have on the capital invested by him.
Suppose a forecast is made that an investment IC will generate for n years, annual incomes in the amount of P 1, P 2, The total accumulated value of discounted income PV and net present value NPV are respectively calculated by the formulas:.
When forecasting income by year, it is necessary, whenever possible, to take into account all types of receipts, earnings 1000 per day via the Internet production and non-production, that may be associated with this project.
Evaluation of investment effectiveness
So, if at the end of the project implementation period it is planned to receive funds in the form of the liquidation value of the equipment or release of a part of the working capital, they should be accounted for as income of the corresponding periods.
If the project involves not a one-time investment, but a consistent investment of financial resources for m years, then the formula for calculating NPV is modified as follows:where i is the projected average inflation rate. It should be noted that the NPV indicator reflects the forecast estimate of changes in the economic potential of the enterprise in case of adoption of the project in question. This indicator is additive in the temporal aspect, i. This is a very important property that distinguishes this criterion from all the others and allows you to use it as the main one when analyzing the investment portfolio optimality.
Return on investment index- PI Profitability Index This method is essentially a consequence of the net present value method. In contrast to the net present effect, the profitability index is a relative indicator.
Thanks to this, it is very convenient when choosing one project from a number of alternative ones having approximately the same NPV values. The meaning of calculating this coefficient when analyzing the method of options in assessing the effectiveness of investment projects of planned investments is as follows: IRR shows the maximum allowable relative level of expenses that can be associated with this project. For example, if the project is fully funded by a commercial bank loan, the IRR value indicates the upper limit of the acceptable level of the bank interest rate, the excess of which makes the project unprofitable.
In practice, any enterprise finances its activities, including investment, from various sources. As a fee for the use of financial resources advanced in the activities of the enterprise, it pays interest, dividends, remuneration, etc.
This indicator reflects the minimum return on the capital invested in its activities that has developed at the enterprise, its profitability and is calculated by the arithmetic average formula. The economic meaning of this indicator is as follows: the company can make any investment decisions whose profitability is not lower than the current value of the CC indicator or the price of the source of funds for this project, if it has a target source.
It is with him that the IRR calculated for a particular project is compared, while the relationship between them is as follows. The practical application of this method is complicated if the analyst does not have a specialized financial calculator at his disposal. Discounted payback period - DPP Discounted Payback Period There are a number of situations in which the application of a method based on the calculation of the payback period may be appropriate.
In particular, this is a situation where the company's management is more concerned with solving the liquidity problem, and not with the profitability of the project - the main thing is that the investments pay off as soon as possible. The method is also good in situations where investments involve a high degree of risk, therefore, the shorter the payback period, the less risky the project.
This situation is typical for industries or activities that are inherent in a high probability of fairly rapid technological changes. Based on accounting estimates "statistical" methods Payback period - PP Payback Period This method is one of the simplest and most widespread in the world accounting and analytical practice; it does not imply a temporary ordering of cash receipts.
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- Evaluating the Effectiveness of the Investment Project.
- Problem of evaluating the efficiency of investment projects in the Russian economy UDC
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The algorithm for calculating the payback period PP depends on the uniform distribution of the projected income from the investment. If income is distributed evenly over the years, then the payback period is calculated by dividing the one-time costs by the amount of annual income due to them.
Upon receipt of a fractional number, it is rounded up to the nearest integer. If the profit is unevenly distributed, then the payback period is calculated by a direct calculation of the number of years during which the investment will be repaid by cumulative income.
Evaluating the Effectiveness of the Investment Project :: Science Publishing Group
Some experts, when calculating the PP indicator, still recommend taking into account the time aspect. Obviously, the payback period is increasing. The payback period of an investment is very simple to calculate, however, it has a number of disadvantages that must be taken into account in the analysis. Firstly, it does not take into account the effect of recent incomes.
As an example, we consider two projects with the same capital costs 10 million rublesbut with different projected annual revenues: for method of options in assessing the effectiveness of investment projects A - 4. Both of these projects during the first three years provide a return on capital investments, therefore, from the standpoint of this criterion, they are equal. However, it is obvious that Project B is much more profitable.
Secondly, since this method is based on undiscounted estimates, it does not distinguish between projects with the same amount of cumulative income, according to its different distribution by year. So, from the position of this criterion, project A with annual revenues of Thirdly, this method does not have the additivity property. The calculation algorithm is extremely simple, which determines the widespread use of this indicator in practice: the investment efficiency ratio ARR is calculated by dividing the average annual profit PN by the average investment the coefficient is taken as a percentage.
The average investment is found by dividing the initial amount of capital investment by two, if it is assumed that after the expiration of the implementation period of the analyzed project all capital expenditures will be written off; if residual or residual value RV is allowed, then its valuation should be excluded. This indicator is compared with the profitability ratio of advanced capital, calculated by dividing the total net profit of the enterprise by the total amount of funds advanced in its activities total average net balance.
The method, based on the coefficient of investment efficiency, also has a number of significant drawbacks, mainly due to the fact that it does not take into account the time component of cash flows. In particular, the method does not distinguish between projects with the same amount of average annual profit, but a varying amount of profit over the years, and also between projects that have the same average annual profit, but generated over a different number of years.
Special methods The IRR and NPV methods described above are among the traditional methods of evaluating investments and have been used for more than three decades.
In the vast majority of cases, the definition of net present value and the internal rate of return on a project exhausts the analysis of effectiveness. This state of things has an objective basis: these methods are quite simple, are not associated with cumbersome calculations and can be used to evaluate almost any investment projects, i.
However, the reverse side of this universality is the inability to take into account the specifics of the implementation of some investment projects, which to some extent reduces the accuracy and correctness of the analysis.
Special methods allow you to focus on certain points that could be of serious importance to a financial investor and to examine in more detail the investment project as a whole. The main special methods for assessing effectiveness can be divided into two groups: methods based on determining the final cost of an investment project, i. Thus, they are based on a fundamentally different approach than traditional methods; methods that are a modification of traditional calculation schemes.