This is an optional mechanism from the point of view of current legislation. However, before making investments, each investor seeks to secure their assets and obtain sufficient justification for possible risks. This task is assigned to full-time financiers or outsourced specialists. The evaluation is carried out using the discounted cash flow method. First, the class of the investment project is determined, and then the method for performing the analysis is selected.

Why do we need an assessment?

Since investment resources are limited, the issue of their correct use is especially acute. In this regard, top management works to obtain the maximum result from the attracted investment volume and at the same time minimize the expenditure of investment resources, if the priority is the effectiveness of investments.

Assessment of the financial feasibility of an investment project comes down to the creation and analysis of an economic and mathematical model for implementing a business case. Investment project assessment is used in the process of preparing project documentation, searching for investors, selecting an insurance program, lending or investment. The mechanism is relevant for investment projects of all forms and areas of work.

The assessment is carried out comprehensively. It includes determining the economic efficiency of projects and their financial solvency. As a result, the one who decides whether or not to invest in the project receives a full package of information that can influence his decisions. The more complete and reliable the information is provided, the more accurate the assessment result will be. After all, it is thanks to them that the methods of analysis, formulas and forms of interpretation of these calculations are selected. It is important to understand that the qualifications of specialists greatly affect the quality of the assessment. That is why analytics should be trusted to the financiers of the Royal Finance company, who perform the assigned tasks impeccably accurately and on time.

Stages

Each project goes through several successive stages of verification. The key task is to assess the investment risk and investment attractiveness of the business plan, identify production and investment costs, and determine the economic viability of the company. All this is done to justify the feasibility of investments and participation of all partners in the project. In order to exclude bias and personal interest, the assessment is entrusted to independent experts. Royal Finance financiers will cope with this task quickly and efficiently, providing substantiated conclusions and accurate calculations.

The basic principles of assessing the effectiveness of investment projects allow you to accurately and fully determine the risks, payback periods of the project and investments. Before assessing an investment project, specialists should determine its class. This is done by the degree of integration into the company implementing it and by the use of borrowed capital. According to the first criterion, investment projects are integrated and economically isolated, and according to the second, they are leveraged and unleveraged. Integrated projects are divided into typical and atypical, as well as large-scale and small-scale. Separate ones are analyzed by asset accounting, separate financing and financial results. Evaluation procedures are divided into two large stages.

Overall project efficiency

The goal is to create conditions for finding investors and economic evaluation of project solutions. According to the general approach, the effectiveness of organizational and technical and technological solutions presented in the project is assessed. At the first stage, investment and production costs are analyzed, estimates are made, financing is distributed among the stages of implementation, and a comparative analysis is conducted. Then, the overall project efficiency indicators are calculated. These may be the social and financial consequences of implementing the investment project for budgets, if they are involved. Experts determine the social significance of the project. Both types of positions (commercial and public) are considered in the context of one participant who implements the case at his own expense. If the social attractiveness is at a sufficient level, they proceed to an analysis of the commercial significance. If the social aspect does not reach the required level, the commercial attractiveness is increased by attracting finance from different sources. They proceed to the next stage only if the assessment shows an acceptable payback. This parameter is omitted if the financing conditions and source are already known.

Efficiency of participation in the project

Participants can be shareholders, banks providing loans to the project, companies implementing the project, lessors and other organizations. Since the project assumes social significance and influence on the interests of various bodies and structures, an important milestone of the stage is the analysis of the feasibility of participation in the project.

Goals - to determine the degree of feasibility of the project and the interest of all participants in it. Specialists determine the profitability of the project for each potential participant, taking into account their criteria and interests. Evaluation of the profitability of participation in the project involves studying the effectiveness of participation of enterprises in the project, investing in the company's shares, as well as the participation of higher-level structures.

For local projects, we are talking about budget efficiency, participation of individual enterprises and investments in shares. For socially significant projects, regional and industry attractiveness are of primary importance. Only after a satisfactory result do they move on to calculations.

This stage involves choosing a financing scheme and determining the number of participants. At this stage, sources of financing, conditions for attracting investors are named, the consolidated flow of funds to cover all costs of the investment project is calculated. The investment scheme is justified. At this stage, not only economic, but also ecological and social justification is carried out. The project must fit into social standards and norms, and respect human rights.

Criteria

The assessment is based on fundamental principles. Responsible persons must analyze the investment project at all stages of its life cycle, all forecasts of financial flows must be justified. Each assessment of the investment project is carried out according to the most pessimistic scenario of events. Different projects are brought into a comparable form to make an objective decision. All available options are compared to choose the most economically and socially beneficial. At the same time, the dynamics of changes in cash flows at each level of case implementation are taken into account. The time factor, the impact of inflation, the main consequences of project implementation, receipts and expenditures of funds are necessarily taken into account. It is important to take into account the degree of participation in the project of each of the partners and stakeholders, as well as the amount of their interests. As well as the need to create working capital and the impact of key risks.

The classical approach to assessing the investment attractiveness of a project involves a set of criteria by which the effectiveness is analyzed. A qualified financier will be able to determine the criteria after studying the proposed package of documents. When deciding on the feasibility of investing in a project, the following aspects are taken into account:
net present value (NPV);
Internal rate of return (IRR);
Discounted payback period (DPP);
Free cash flow (FCF);
Profitability index (PI).
The main criterion for individual investment projects is the net present value or adjusted present value. If the value is zero, then the case can bring profitability. Positive calculation values mean that the funds invested in the project will increase the value. Negative ones mean insufficient financial attractiveness.

Internal rate of return is an additional criterion. Payback is guaranteed if this indicator corresponds to the required profitability. Discounted payback period is an auxiliary indicator that will allow you to quickly identify cases with slow payback.

Methods

There is a system of simple indicators for assessing the effectiveness of investment projects, which allows characterizing a business case according to the interests of all parties involved in the investment process. During the analysis, the multifaceted and complex process of implementing an investment project is simplified, focusing on the main thing and discarding minor factors. As a result, it is not so much the project that is analyzed, but the cash and material flows associated with it. The complexity of the assessment lies in reflecting the interests of investors in computational formulas, and converting the project documentation into the language of cash flows.

All methods are divided into static and dynamic by the time factor. One or another option is selected based on the conditions for implementing investment projects, their features and the goals of investors.

Static methods

Static methods for assessing the effectiveness of investment projects involve an equal comparison of all payments and receipts at different points in time. They are used mainly for short-term cases. Investments made at the beginning of the period demonstrate results at its end. These methods are considered simple. They are used for quick and rough analysis of business project profitability. They are relevant at the initial stages of investment project examination. The selection criteria are profit, profitability and costs (cost price). This group of methods involves a comparative calculation of costs, profit and profitability. The optimal value of one of these indicators serves as the basis for choosing an investment project.

In order to correctly use static methods, all investment alternatives and projects are brought to a single form. Static methods include analysis of the project's break-even point, calculation of present costs, as well as:

Payback period. The period of time during which a new or improved enterprise will be able to recoup the investments made in it through profit from business activities. This can also be the period during which the initial investment will be equal to income. The method is based on determining the payback period for investments. The amount of regular receipts and the amount of initial contributions are used for the calculation. The amounts are taken into account without the inflation rate, taxes and depreciation.
Efficiency ratio. Most often, this indicator is understood as the interest rate of long-term lending. As a result, investors will know the amount of profit they can receive from each ruble invested. To calculate, the average annual profit is divided by the average investment volume.

These methods have their drawbacks, and the main one is that the time factor is omitted, and incomparable values are involved in the calculations - profit is considered in future value, and investments - in current value. As a result, the attractiveness coefficient decreases, and payback periods increase, which distorts the data and leads to false conclusions.

Dynamic methods

This is a group of more complex technologies that take into account multiple aspects. As a rule, they are used to evaluate investment projects that are large in time and volume.

Dynamic methods for evaluating the effectiveness of investment projects involve discounting all payments and receipts for different periods of time to a single point in time to ensure comparability. Dynamic methods are associated with the need to compare the funds that business entities receive or pay at different times. With many alternative investment options, the one that promises the greatest profit is given priority.

The main difficulty is that a measurement scale or scale for evaluation is needed to calculate cash flows over time. Discounting is used for this purpose - calculating the current equivalent of the amounts received or paid at different points in time. These methods are primarily applicable to long-term enterprises in which expenses and income will change over time. With the right inputs, they provide reliable profitability forecasts. The following evaluation methods are distinguished:

Discounting free cash flow at the cost of equity. Involves calculating the net present value (NPV). The most significant indicator that demonstrates a direct increase in capital. Among several, experienced investors will always choose the investment project with the highest NPV. It is defined as the difference between expenses and income for the calculation period. Suitable for integrated and separate projects. A special formula is used to determine the net present value of the project or net present value. The calculations use the cost of equity equal to the discount rate. For calculations, it is necessary to know the volume of initial investments, the discount rate, the time period and the cash flow from the implementation of investments. A negative NPV value indicates unprofitability of investments.

Profitability index of investment (PI). It is important when choosing a project among several with the same NPV, but different investment needs. It is calculated as the ratio of the current volume of cash inflow to the net value of cash outflow. Initial investments are taken into account. It is important that the PI indicator is greater than one. Otherwise, it makes no sense to invest in the project.

Discounting at the weighted average cost of capital of the company. Relevant for businesses with an equal ratio of debt and equity, that is, with a stable level of financial leverage. Such an investment project shares the risks of the main business, but cannot affect the capital structure due to its insignificant scale.

Internal rate of return or investment profit (IRR). This is the discount rate at which the net present value is zero. Calculations are carried out to assess the maximum allowable volume of project expenses. This indicator determines the upper limit of the bank interest rate, if financing comes from it, the simplicity of which makes the project unprofitable.

The discounted payback period of the investment (DPP) differs from a similar static method, since the time value of money is taken for calculations. In this case, the payback period increases. And if one project was profitable according to the PP criterion, it may be unprofitable according to the DPP. Payback period calculation is a method that complements net present value and internal form of profitability.

Free cash flow assessment based on adjusted present value. This method is applied to enterprises with a mixed capital structure, including large projects implemented in a new area. It involves taking into account tax benefits and other effects of investment project financing.

Using a set of simple and more complex methods, it is possible to draw conclusions about the payback and profitability of projects, choose the optimal source of financing and a scenario for implementing a business case.