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Makeevka Institute of Economics and Humanities

Department of Enterprise Economics

Practical task

in the discipline "Investment activity"

Makeevka - 2009

Individual task number 7

The company is considering the feasibility of implementing investment project, the main indicators of which are presented in the table (for three options).

The company uses the straight-line method of depreciation. The income tax rate is 25%.

Assess the economic efficiency of the implementation of the investment project by calculating the net present value and the return on investment index if the project discount rate is 12% (or 15%).

Graphically and by calculation, determine the break-even point of the project.

Indicators	Values ​​of indicators by options
Sales volumes for the year, pcs
Project implementation period, years

Draw conclusions by characterizing the level investment attractiveness And investment risk project.

Solution:

1. Calculate the net present value of the project for three options.

Let's determine the amount of cash flows during the implementation of the project in the first option. We will enter the data in table 1.

Table 1. Cash flows for the implementation of the investment project

	Sales proceeds, UAH
	Investments, UAH
	Variable costs, UAH
	Fixed costs, UAH
	Depreciation
	Profit(01-03-04-05)
	Net profit (06*0.75)

Let us determine the discounted indicators for evaluating the economic efficiency of the project, if the project discount rate is

NPV = - I s, where (1)

I with - primary investments.

i - discount rate.

NPV = - 420000 = 876013.07 - 420000 = 456013.07 UAH

Return on investment R.

R == 2.08 R > 1

NPV = - 420000 = 798592.57 - 420000 = 378592.57 UAH

Profitability R== 1.90

Let's determine the amount of cash flows during the implementation of the project in the second option. We will enter the data in table 2.

Table 2. Cash flows for the implementation of the investment project

	Sales proceeds, UAH
	Investments, UAH
	Variable costs, UAH
	Fixed costs, UAH
	Depreciation
	Profit(01-03-04-05)
	Net profit (06*0.75)
	Net cash flow, UAH (05+09)

NPV = - I s, where (1)

Cash receipts for the k-th year;

I with - primary investments.

i - discount rate.

In our case

NPV = - 510000 = 1434405.98 - 510000 = 924405.98 UAH

Net present value NPV is positive, the project is suitable for implementation.

Return on investment R.

R == 2.81 R > 1

At a discount rate of 15%:

NPV = - 510000 = 1295714.09 - 510000 = UAH 785714.09

Profitability R== 2.54

Let's determine the amount of cash flows during the implementation of the project in the third option. We will enter the data in table 3.

	Sales proceeds, UAH
	Investments, UAH
	Variable costs, UAH
	Fixed costs, UAH
	Depreciation
	Profit(01-03-04-05)
	Net profit (06*0.75)
	Net cash flow, UAH (05+09)

Let's determine the discounted indicators for evaluating the economic efficiency of the project, if the project discount rate is i = 12%.

NPV = - I s, where (1)

Cash receipts for the k-th year;

I with - primary investments.

i - discount rate.

In our case

NPV = - 690000 = 921993.94 - 690000 = 231993.94 UAH

Net present value NPV is positive, the project is suitable for implementation.

Return on investment R.

R== 1.33 R > 1

At a discount rate of 15%:

NPV = - 690000 = 832846.87 - 690000 = 142846.87 UAH

Profitability R== 1.20

Graphically and by calculation, we will determine the break-even point of the project.

Calculate the break-even point using the formula:

TB==570pcs

So, we will choose for implementation the project with the highest profitability indicator. The project according to option 2 has the highest profitability R = 2.81 at a discount rate of 12%.

Individual task number 1

The enterprise is considering the feasibility of implementing an investment project, the main indicators of which are presented in Table 1.

It is necessary to characterize the level of investment attractiveness and investment risk for each investment option, while:

1. Evaluate the economic efficiency of the investment project by calculating the net present value and the investment profitability index if the project discount rate is 10%.

2. Determine the net discounted income, if due to the acquisition of new, more advanced equipment, variable costs will decrease to 0.19 thousand gr. per unit of production (at the same time, the cost of acquiring fixed assets will increase by 198 thousand gr.).

3. By calculation, determine the break-even point for two alternative options.

Table 1. Information for solving the problem

Indicators	Values
Sales volumes for the year, pcs
Unit price, thousand UAH
Variable costs for the production of a unit of production, thousand UAH
Annual fixed costs excluding depreciation of fixed assets, thousand UAH.
Annual depreciation rate of fixed assets, %
Initial investment costs, thousand UAH
Including fixed assets, UAH ths.
Project implementation period, years
Income tax rate, %

Solution:

The enterprise is considering the implementation of two investment projects: the data on the first one are shown in Table 1, the second one is distinguished by the acquisition of more advanced equipment (variable costs will decrease to UAH 0.19 thousand per unit of production, and the cost of acquiring fixed assets will increase by UAH 198 thousand) .

1. Let's evaluate the economic efficiency of the implementation of the first investment project. Let's determine the amount of cash flows during the implementation of the project. We will enter the data in table 2.

Table 3. Cash flows for the implementation of the investment project

	Sales proceeds, UAH
	Investments, UAH
	Variable costs, UAH
	Fixed costs, UAH
	Depreciation
	Profit(01-03-04-05)
	Net profit (06*0.75)
		-740000,0

NPV = - 740000 = 798664.1 -740000 = 58664.1 UAH

Return on investment R.

R== 1.08 R > 1

Net present value NPV is positive, the project is suitable for implementation, but the profitability of the project is low, slightly more than 1.

2. Determine the amount of cash flows during the implementation of the project in the second option, if due to the acquisition of new, more advanced equipment, variable costs will decrease to UAH 0.19 thousand. per unit of output (at the same time, the cost of acquiring fixed assets will increase by UAH 198,000). Assume, since the condition of this does not stipulate additionally, that the total amount of investments will increase by the amount of the increase in fixed assets (the amount of working capital remains unchanged).

Table 3. Cash flows for the implementation of the investment project

	Sales proceeds, UAH
	Investments, UAH
	Variable costs, UAH
	Fixed costs, UAH
	Depreciation
	Profit(01-03-04-05)
	Net profit (06*0.75)
	Net cash flow, UAH (05+07)

Let's determine the discounted indicators for evaluating the economic efficiency of the project, the project discount rate is i = 10%.

NPV = - 938000 = 1030960.7-938000 = UAH 92960.7

Return on investment R.

R== 1.1 R > 1

By calculation, we will determine the break-even point of the project according to the formula:

TB = , where

TB - break-even volume, pcs;

PI - fixed costs, UAH;

C i - price per unit of production, UAH;

PerI i - variable costs per unit of production, UAH.

TB 1 = = 662 pcs.

TB 2 = = 542 pcs.

In all respects, the second project is more attractive, gives a higher absolute income, somewhat higher profitability, and has a large margin of safety. We are accepting a second project.

Individual task number 3

The company plans to purchase a new production line. Data characterizing the level of production and sales of products for three alternative investment options are presented in Table 3.

Using these data, it is necessary to justify the safest investment option, while:

1. For each alternative investment option, find the break-even point.

2. Build a break-even chart for each investment option.

3. Determine the return on investment if it is known that, according to optimistic estimates, the sales volume will be 140% of the break-even point (probability 35%), the expected sales volume is planned to be 15% more than the break-even point (probability 0.5), according to pessimistic estimates, the sales volume will be 5% below the breakeven point (probability 0.15).

Table. Initial data for evaluating the effectiveness of the project (for three options)

Indicators	Indicator values
	Option 1	Option 2	Option 3
Annual fixed costs, UAH
Variable costs for the production of a unit of production, UAH
Unit price, UAH
Necessary investments, UAH

Solution:

By calculation, we will determine the break-even point for each alternative option using the formula:

TB = , where

TB - break-even volume, pcs;

PI - fixed costs, UAH;

C i - price per unit of production, UAH;

PerI i - variable costs per unit of production, UAH.

For the first option TB 1 = = 26923 pcs.

For the second option TB 2 = = 49473 pcs

For the third option TB 3 = = 49333 pcs

2. Let's build a break-even chart for each investment option (Fig. 1, Fig. 2, Fig. 3).

Obviously, the graphs confirm the calculated data.

3. Determine the return on investment if it is known that, according to optimistic estimates, the sales volume will be 140% of the break-even point (probability 35%), the expected sales volume is planned to be 15% more than the break-even point (probability 0.5), according to pessimistic estimates, the sales volume will be 5% below the breakeven point (probability 0.15).

Since in our case the determination of the sales volume is probabilistic, we will find the average sales volume using the formula:

, Where

- average sales volume,

- volume of sales,

- probability.

269231.40.35+269231.150.5+269230.950.15 = 32509 pcs.

Drawing 1

493331.40.35+493331.150.5+493330.950.15 = 59569 pcs.

To determine the profitability of an investment R, it is necessary to calculate the ratio of cash inflows to cash outflows (in our case, the ratio of gross revenue to the amount of required investments).

R 1 == 0.44 R< 1

R 2 == 0.67 R< 1

Figure 2

R 3 == 0.71 R< 1

The profitability of all three projects is less than one. Under these conditions, none of them can be recommended for implementation. However, it should be taken into account that, according to the condition of the task, the implementation of projects is considered only within one year. In fact, investments give returns over several years. If we consider projects in a longer period, then the profitability will certainly increase and take acceptable values. In this case, the third option is the most interesting (R is the maximum).

Figure 3

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The company decided to organize the production of plastic construction shells. The design of the site for their manufacture provides for the implementation of construction and installation works (construction of production facilities, purchase and installation of process equipment) within three years. The operation of the site and the manufacture of shells are designed for 11 years. It is planned to start functioning of the site immediately after the completion of construction and installation works. Other initial data are given in Table 3.1

Table No. 3.1

Year	Capital investments	Volume of production	Unit price	Fixed costs (no depreciation)	variable costs	taxes	Liquidation stand.
0th
1st	1,8
2nd	2,3
3rd	1,9
4th
5th		1,08	1,06	1,03	1,05	1,18
6th		1,15	1,11	1,05	1,08	1,36
7th		1,21	1,15	1,07	1,12	1,5
8th		1,26	1,20	1,09	1,17	1,74
9th		1,30	1,24	1,11	1,19	2,0
10th		1,33	1,27	1,12	1,22	2,2
11th		1,35	1,29	1,14	1,24	2,3
12th		1,36	1,30	1,15	1,27	2,3
13th		1,1	1,33	1,16	1,29	1,8
14th		0,8	1,35	1,18	1,32	1,05

Values ​​of capital investments (K = 8.6), production volume (N np = 15.75), prices (P = 7.3), fixed costs (C n = 2.32), taxes (H = 16.8) , liquidation value (L=10) and discount rate (q н= 0.227) for control work each student are shown in table 3.2.

Define indicators of the internal rate of return, net present value, return on investment, payback period of investments and the object. Establish the economic feasibility of organizing the production of plastic construction shells.

In the process of construction and installation works, the enterprise used a loan for their investment commercial bank, (the project will be invested at the rate of 60% from credit funds and 40% from own funds). According to the terms of the agreement between the bank and the entrepreneur, the loan will be repaid within 4 years in the following shares (%): 1st year - 30, 2nd year - 25, 3rd - 25, 4th - 20. For using the loan, the entrepreneur must pay the bank for the 1st year 22% of the amount used during the year, for the 2nd - 26%, for the 3rd - 32% and for the 4th - 35%.

Determine how the project efficiency will change when the enterprise uses a loan from a commercial bank. Make a conclusion about the impact of credit on investment efficiency.

To identify the effectiveness of investments in the implementation of the project, the following calculation operations are performed.

The indicator of the internal rate of return is determined:

D i - income of the enterprise in i-th year life cycle;

K i - investment in the object in the i -th year;

T is the life cycle of the object from the beginning of construction to the end of its operation in years;

q - indicator of the internal rate of return, in fractions of a unit.

The income of the enterprise in the i-th year of the life cycle of the object is determined by the formula:

(3.2)

N npi - production volume in the i-th year;

Пi - price of a unit of production in the i-th year;

C ni - variable costs per unit of output in the i-th year;

С pos i - fixed costs in the i-th year;

L i - the value of the liquidation value in the i-th year.

2. The indicator of net present value is determined by the formula:

(3.3)

q n - the rate of discounting costs to the beginning of the construction of the facility;

H - reduced net income.

The rate of return on investment is determined as follows:

(3.4)

(3.5)

t ok - payback period of investments.

The payback period of the operating object is calculated by the formula:

t - payback period of the object;

The period of time from the start of investment to the start of operation of the facility.

a) Solving the task without taking into account the credit

Starting to solve the task, it is necessary, first of all, to transform the initial data, expressed through indices, into absolute figures. Such settlement transaction for the variant under consideration was produced, and its results at the beginning of the corresponding year are presented in Table 3.3.

The initial information part of the table (the first seven columns) is filled in by multiplying the indicator index by its value with a single index.

The first indicator is the unit cost of production (C):

C \u003d C n + C pos: N \u003d 2.32 + 35.7: 15.75 \u003d 4.587 rubles / m 2.

The second indicator is the balance sheet profit of the enterprise (P b):

P b \u003d N * (C-S) \u003d 15750 * (7.3-4.587) \u003d 42.735 million / year.

The third indicator is net profit (D)

D \u003d P b - H \u003d 42735 - 16800 \u003d 25935 thousand / rub.

The results obtained, necessary for further calculations, are summarized in table 3.4, which characterizes the costs and results of an entrepreneurial investment project without a loan (thousand rubles).

Table No. 3.3

Year	Capital investments million rubles	Production volume million m2/year	Price RUB/m2	Fast. costs million rubles/m2	Variable costs RUB/m2	Taxes million rubles	C, rub. per m2	Pb, million rubles	D million rubles
						/year		/year	/year
0th	8,6
1st	15,48
2nd	19,78
3rd	16,34
4th
5th		15,75	7,3	35,7	2,32	16,8	4,587	42,735	25,935
6th		17,01	7,738	36,771	2,436	19,824	4,598	53,416	33,592
7th		18,1125	8,103	37,485	2,5056	22,848	4,575	63,898	41,050
8th		19,0575	8,395	38,199	2,5984	25,2	4,603	72,270	47,070
9th		19,845	8,76	38,913	2,7144	29,232	4,675	81,062	51,830
10th		20,475	9,052	39,627	2,7608	33,6	4,696	89,185	55,585
11th		20,9475	9,271	39,984	2,8304	36,96	4,739	94,930	57,970
12th		21,2625	9,417	40,698	2,8768	38,64	4,791	98,363	59,723
13th		21,42	9,49	41,055	2,9464	38,64	4,863	99,109	60,469
14th		17,325	9,709	41,412	2,9928	30,24	5,383	74,946	44,706
15th		12,6	9,855	42,126	3,0624	17,64	6,406	43,461	25,821

Let's define the internal rate of return.

Its calculation is based on the equality investment investments and net profit, which are reduced to zero time by discounting according to equation (22). The result is q=0.32286. With such a rate, the total income and total investment investments, given by the beginning of the investment project, will be equal and amount to 38664 thousand rubles.

Table No. 3.4

Year	Investment investments	Net profit
0th
1st
2nd
3rd
4th
5th
6th
7th
8th
9th
10th
11th
12th
13th
14th
15th

2. Let's determine the indicator of net present value (N) according to the formula (3.3). H \u003d 29563 thousand rubles.

At the same time, the net total present income is 72,763 thousand rubles. The total investment brought in is 43,200 thousand rubles.

Let's determine the rate of return on investment by the formula (3.4):

This means that the project, during its implementation, will allow you to fully return all investment funds and plus to this, receive an income of 68.4% of the entire invested amount.

Let's determine the payback period for investments and the object being sold.

The payback period is determined by the formula (3.5). It will be 6.1 years.

The payback period of the object itself in accordance with equation (3.6) will be 2.1 years.

Thus, all the necessary indicators of the investment project have been determined, and it can be concluded that it is expedient to implement it, since its most important performance parameters (internal form of return, net present value, return on investment and payback period) are much better than the normative values.

B) The solution of task No. 6, taking into account the loan

The solution of the problem begins with the definition actual investments in the implementation of the project, taking into account the repayment of loans in accordance with the agreement between the entrepreneur and the bank. The calculation results are summarized in Table 3.5.

How to complete this table.

The figures of the 2nd column represent the amount of investment in the project according to the conditions of the problem.

The figures of the 3rd column are the company's own investments in the project (40% of the required investments), the 4th column - investments at the expense of a commercial bank loan (60% of the required investments).

The fifth column presents the amounts characterizing the repayment of the loan by years under the terms of the agreement, respectively (30%, 25%, 25% and 20%). The entire loan amount is 5100 thousand rubles. will be returned to the bank in portions over three years (1548+ 1290+ 1290+ 1032= 5160).

The 2nd, 3rd and 4th columns of the total array of the 5th column are calculated and filled in the same way. The 6th column contains the sums of the rows of the 5th column.

Table No. 3.5

year	Investments in the project, thousand rubles	Inc. boards. to the project, thousand rubles	Bank loan, thousand rubles	Loan repayment by years, thousand rubles	Overall loan repayment	Payments before, thousand rubles
0th
1st
2nd					2786,4			4076,4	11988,4
3rd						3560,4		7172,4	13708,4
4th							2941,2	9262,2	9262,2
5th					1857,6			7275,6	7275,6
6th						2373,6		4824,6	4824,6
7th				-	-	-	1960,8	1960,8	1960,8

The 6th column contains the sums of the rows of the 5th column.

The last column is filled in by summing the numbers of the 3rd and 6th columns; the sum of the numbers of the 2nd column is exactly equal to the sum of the 7th column and amounts to 60,200 rubles.

Payments for the use of credit resources are established by the agreement. In accordance with it, the entrepreneur pays the bank for the first year of using the loan 22% of the total amount, in the second and subsequent years - 26, 32 and 35% of the residual loan amount. The calculation results are presented in table 3.6.

All numbers in the rows are summed up, and the results are put down in the 4th column of the table. This is the final result of interest payments for used Bank loan broken down by years. By the amount of these amounts, the income of the entrepreneur will be reduced, and for the bank, on the contrary, it will increase.

Determining the effectiveness of a loan for a bank provided in table 3.7.

To determine the indicator of the internal rate of return for a bank, it is necessary to solve the equation:

As a result of the solution q = 0.2531.

The efficiency of project implementation with a loan turned out to be higher than without a loan.

Table No. 3.6

Year	Calculation of payments for a loan from the residual amount of the borrowed amount, thousand rubles. * for interest	The value of the payment amounts for the loan, thousand rubles	Fee, thousand rubles
1st	5160*22%				5160*22%	1141,8
2nd	3612*26%	9288*22%			3612*26%+9288*22%	2982,48
3rd	2322*32%	6501,6*26%	11868*22%		2322*32%+6501,6*26%+11868*22%	5044,416
4th	1032*35%	4179,6*32%	8307,6*26%	9804*22%	1032*35%+4179,6*32%+8307,6*26%+9804*22%	6015,528
5th		1857,6*35%	5340,6 *32%	6862,8*26%	1857,6*35%+5340,6 *32%+6862,8*26%	4143,48
6th			2373,6*35%	4411,8*32%	2373,6*35%+4411,8*32%	2242,536
7th				1960,8*35%	1960,8*35%	686,28

Table 3.7

The amount of credited Money, thousand roubles.	year	Loan repayment + interest for a loan, thousand rubles
	0th
	1st	2689,8(1548+1141,8)
	2nd	7058,88(4076,4 +2982,48)
	3rd	12216,82(7172,4 + 5044,42)
	4th	15277,73 (9262,2 + 6015,53)
	5th	11419,085 (7275,6 + 4143,48)
	6th	7076,14 (4824,6 + 2242,54)
	7th	2647,08 (1960,8 + 686,28)
Total 36120		Total 58376.52

As mentioned above, the implementation of any investment project must be preceded by its economic justification, i.e. development of a business plan. When developing a business plan, Methodological recommendations for evaluating the effectiveness of investment projects (official publication) approved by the Ministry of Economy of the Russian Federation, the Ministry of Finance of the Russian Federation, State Committee RF on construction, architectural and housing policy June 21, 1999 No. VK 477.

Overall project efficiency is evaluated in order to determine the potential attractiveness of the project, the expediency of its acceptance by possible participants. It shows the objective acceptability of an investment project in terms of economic efficiency, regardless of the financial capabilities of its participants. When evaluating the effectiveness of the project as a whole, its social significance should be taken into account, taking into account the scale of the investment project. The economic, social and environmental consequences of the implementation of global, national economic or large-scale projects affect the entire society. That is why the effectiveness of the project as a whole is usually divided into two types: public (socio-economic), the assessment of which is necessary for socially significant projects; commercial, the evaluation of which is carried out for almost all ongoing projects.

Public efficiency takes into account the social economic consequences implementation of an investment project for society as a whole, including both the direct costs of the project and the results from the project, as well as "external effects" - social, economic, etc.

Commercial efficiency reflects the economic consequences of the project for its participant, assuming that he independently bears all the necessary costs for the project and uses all its results. In other words, when evaluating commercial efficiency, one should abstract from the ability of project participants to finance the costs of an investment project, conventionally assuming that the necessary funds are available.

Efficiency of participation in the project allows you to assess the feasibility of an investment project, taking into account the financial capabilities and interest in it of all its participants. This efficiency can be of several types:

• o the effectiveness of the participation of enterprises in the project (its effectiveness for enterprises - participants in the investment project);
• o efficiency of investing in the shares of the enterprise (efficiency for the shareholders of the company - participants in the investment project);
• o the effectiveness of participation in the project of structures of a higher level in relation to enterprises - participants in the investment project (national economic, regional, industry, etc.);
• o budgetary efficiency of the investment project (effectiveness of state participation in the project in terms of expenditures and revenues of budgets of all levels).

General scheme for evaluating the effectiveness of an investment project. First of all, the social significance of the project is determined, and then the evaluation of the effectiveness of the investment project is carried out in two stages.

At the first stage, the performance indicators of the project as a whole are calculated.

The second stage is carried out after the development of the financing scheme. At this stage, the list of participants is specified, the financial feasibility and effectiveness of participation in the project of each of them are determined.

There are many methods for evaluating the effectiveness of investment projects. Conventionally, these methods can be divided into two groups (Fig. 6.3): simple, or static; discounted.

Rice. 6.3.

Simple, or static, methods do not take into account the time value of money and are based on the assumption that the income and expenses associated with the implementation of the investment project are of equal importance for different periods of time (calculation steps) during which the project's effectiveness is assessed. The most well-known simple methods are simple rate of return and payback period.

simple rate of return determined by the formula

where Pch - the value of the annual net profit; And - the total amount of investment costs.

The simple rate of return is compared to the investor's required rate of return. If it is higher, then this means that the investment project is acceptable (profitable) for the investor.

Payback period this method can be calculated as follows:

where P is the net annual cash flow from the implementation of the investment project, which consists of the annual profit and depreciation charges (Pch + A); A - the annual amount of depreciation.

Discounted Methods are characterized by the fact that they take into account the time value of money.

In world practice developed countries the most widely used method for assessing real investment based on the system of indicators given in table. 6.1.

Table 6 1

The system of indicators for evaluating real investments

Net present value determined by expression

where Rt - results (all cash inflows) achieved on i-th step calculation; 3t - costs (all cash outflows excluding capital investments) carried out at the same step; T - calculation horizon (month, quarter, year); E - discount rate; K - capital investments required for the implementation of the project.

Due to the fact that Ri is all cash income (revenue from sales of products, revenue from the sale of obsolete and obsolete equipment, etc.), and 3t is all costs (costs associated with the production and sale of products, tax payments, etc. .), then the value (Rt - 3t) is the net profit (Π4t) plus depreciation deductions (А(), therefore, the expression

Depreciation charges are added to net profit due to the fact that they remain at the disposal of the enterprise for the simple reproduction of fixed production assets.

This formula is valid if the discount rate for the entire calculation period is constant.

If the discount rate is not constant (it changes from period to period), then the value of the net discounted flow is recommended to be calculated using the formula

Depending on the value of the NPV, a certain investment decision is also made.

Rule. If NPV > 0 - the investment project is profitable. If NPV< 0 - проект является невыгодным. Если ЧДД = 0 - проект не является ни прибыльным, ни убыточным. Решение о его реализации принимает инвестор.

The larger the NPV, the greater the financial safety margin of the project, and hence the lower the risk associated with its implementation.

The criteria for NPV and ID are closely interconnected, since they are determined on the basis of the same calculation base.

Yield index determined by the following formula:

Rule. If ID > 1 - the project is effective. If ID< 1 - проект неэффективен. Если ИД = 1 - решение о реализации проекта принимает инвестор.

Under internal rate of return understand the value of the discount rate (E), at which the NPV of the project is zero, i.e.

This criterion (indicator) shows the maximum allowable relative level of expenses that can be associated with an investment project.

For example, if the project is fully financed by a loan from a commercial bank, then the value of IRR shows the upper limit of the acceptable level of banking interest rate, exceeding which makes the project unprofitable.

In practice, investment projects are financed, as a rule, not from one source, but from several, so GNI must be compared with the weighted average cost of capital (MA).

Rule. If IRR (IRR) > SS - the project should be accepted. TYPE (IRR)< СС - проект следует отвергнуть. ВИД (IRR) = = СС - проект ни прибыльный, ни убыточный.

In practice, IRR is usually found by iterative selection of discount rate values ​​until the NPV becomes equal to 0. This method is quite laborious, therefore, a simplified algorithm for calculating IRR is proposed in the economic literature:

GNI (/DYA) \u003d E, at which NPV \u003d f (E) \u003d 0,

where E1, E2 - the discount rate at which the NPV is positive and negative, respectively; NPV1, NPV2 - the value of positive and negative NPV, respectively.

Discounted payback period (term) - the time for which receipts from production activities enterprises will cover the investment costs. The payback period is measured in years or months.

The use of the payback period as an efficiency criterion is one of the simplest and most widely used methods of economic justification of investments in world practice.

In conditions of high inflation, instability in society and the state, i.e. in conditions of increased investment risk, the role and importance of the payback period, as a criterion for the economic justification of investments, increases significantly.

But in any situation, the shorter the payback period, the more attractive this or that investment project.

The general formula for calculating the discounted payback period is

under which

Example. To implement the investment project, capital investments in the amount of 500 million rubles are required. After the implementation of the investment project, the net cash flows by years (Ph + A) are, million rubles:

• 1st year 150
• 2nd year 200
• 3rd year 250
• 4th year 350

Determine the NPV, ID, VID, Current and, on their basis, draw a conclusion about the economic feasibility of implementing an investment project, if it is known that the discount rate E = 20%.

Solution. 1. Calculate the net present value, million rubles:

2. Calculate the yield index:

3. Find the internal rate of return,%, according to the algorithm

• 4. Let's determine the payback period, years, using various methodological approaches:
• 1) excluding discounting cash receipts:

• 2) taking into account discounted cash receipts:
  • a) based on the average annual amount of cash receipts

b) on the basis of an increase in cash receipts until the value of capital investments is reached

Conclusion. The investment project is economically justified, since all indicators are positive: NPV > 0; ID > 1; IRR > 20%, and the payback period is 3.7 years.

Grade budget efficiency investment project. The implementation of any investment project, especially medium and large, has a positive effect on the revenue side of the budgets of various levels. And if the state participates in the financing of an investment project, then this is reflected in the expenditure part of the budget. In this case, in accordance with the Guidelines for evaluating the effectiveness of investment projects, it is necessary to determine their budgetary efficiency.

where D - budget revenues from the implementation of the project; E - discount rate; n - serial number of the period; P - budgetary expenses for the implementation of the project.

Budget expenditures include:

• o funds allocated for direct budget financing of the project;
• o bank loans for individual participants in the project implementation, allocated as borrowed money subject to compensation from the budget;
• o direct budgetary allocations for surcharges on market prices for fuel and energy carriers;
• o payment of benefits for persons left without work in connection with the implementation of the project;
• o state, regional guarantees investment risks to foreign and domestic participants; and etc.

Budget revenues include:

• o additionally received tax revenues to the budget of various levels from the implementation of the investment project;
• o increase (decrease) in cash receipts from third-party enterprises due to the impact of project implementation on their financial payments;
• o receipt of customs duties and excises in the budget;
• o share premium from the issue of securities for the implementation of the project;
• o Dividends received and government-owned shares and bonds issued to finance the project; and etc.

Along with NDDb, indicators of GNIb, IDb and Tpk.b can be used to assess rational state participation.

Determination of the discount rate in the economic justification of investment projects. Determining the discount rate is the most important stage in the process of economic justification of investment projects, since all criteria (NPV, PI, IRR, RR) depend on its value, on the basis of which an investment decision is made. The discount rate depends on many factors: the level of inflation, the magnitude of the investment risk, the interest on the loan, the sources of financing for the investment project, the investor's requirements for efficiency from the invested capital, the specifics of a particular enterprise and a particular investment project. It should be noted that there are no official regulations prescribing the choice of one or another discount rate. All responsibility for its establishment lies with the specialists who carry out the economic justification of investment projects. They must provide written justification for the discount rate chosen.

The economic literature provides some guidance on choosing a discount rate. For example, if an investment project is fully funded from its own funds, i.e. without involving other sources, then in this case it is recommended to take the discount rate at the level of the return requirements of the investor on the capital invested by him. It is believed that the investor in this case takes into account all the factors that affect the discount rate.

If an investment project is financed from several sources, then the discount rate is determined based on the weighted average cost of capital.

So, if an investment project is financed by own and borrowed funds, then the weighted average price of capital

where dc, d3 are the share of own and borrowed funds, respectively, in total amount resources allocated for the implementation of the investment project, the share of units; Cs, C;, - the price of capital, respectively, own and borrowed funds,%; St - income tax rate, shares of units.

The need to multiply by the value (1 - St) is due to the fact that if interest on a loan is included in the cost of production, then an income tax benefit is formed, therefore, it should be taken into account in the price of capital of borrowed funds.

If the investment project is financed only by borrowed funds, then the discount rate

E \u003d Z (1 - St).

From all of the above, we can conclude that the discount rate should take into account the internal and external factors associated with the implementation of the investment project.

In accordance with the goal, the main tasks were identified: - to study theoretical basis analysis of the investment project; - to give an organizational and economic analysis of Eldorado LLC; - to analyze the feasibility of the implementation of the investment project; - calculate the economic efficiency of the project. The object of the study is LLC Eldorado subject ...

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Based on the study of the market for products that are produced at the enterprise, the possibility of increasing effective demand for it has been established. In this regard, the company is considering the feasibility of acquiring a new production line to increase production in order to increase sales. The assessment of a possible increase in sales volume is established on the basis of an analysis of data on the potential opportunities of competitors. The cost of the line (capital investment for the project) is $18,530; service life - 5 years; profit net of tax on it from the sale of fixed assets at the end of their service life will be $926.5;. cash flows (profit minus tax on it and depreciation deductions from the value of fixed assets put into operation at the expense of capital investments) are forecasted for years in the following volumes: $5406, $6006, $5706, $5506, $5406. The discount rate for determining the present value of cash flows is assumed to be 12% and 15%. The threshold rate for assessing the calculated level of the internal rate of return is set at 16%. The payback period of capital investments acceptable for the enterprise, calculated according to the data on cash flows and the present value of cash flows, is 5 years. Is this project feasible for implementation?

2.2. Determination of present net worth

a) At a discount rate of 12%.

b) At a discount rate of 15%.

2.3. Determination of the internal rate of return

Table 2.1.

Initial data for calculating the IRR indicator.

	Cash flows, $

Based on the calculations given in Table. 2.1, we can conclude that the function NPV=f(r) changes its sign on the interval (15%,16%).

2.4. Determining the payback period (according to cash flow data)

The investment is $18530 in year 0. Cash flows for a five-year period are: $5406, $6006, $5706, $5506, $5406. The income will cover the investment for 4 years. For the first 3 years, income is:

$5406 + $6006 + $5706 = $17118

For 4 years you need to cover:

$18530 - $17118 = $1412,

$1412/ $5506 = 0.26 (approximately 4.1 months).

The total payback period is 3 years 4.1 months.

2.5. Determination of the payback period (according to the present value of cash flows)

a) At a discount rate of 12%.

The income will cover the investment for 5 years. For the first 4 years, incomes are (data taken from Table 2.1):

$4826,79 + $4787,95 + $4061,21 + $3507,01 = $17182,96

For 5 years you need to cover:

$18530 - $17182,96 = $1347,04,

$1347.04 / $3071.59 = 0.44 (approximately 5.4 months).

The total payback period is 4 years 5.4 months.

b) At a discount rate of 15%.

The income will cover the investment for 5 years. For the first 4 years, income is:

$4700,87 + $4550 + $3753,95 + $3146,29 = $16151,11

For 5 years you need to cover:

$18530 - $16151,11= $2378,89,

$2378.89 / $2689.55 = 0.88 (approximately 10.7 months).

The total payback period is 4 years 10.7 months.